FIN 3320 Exam #1
Differentiate (compare) among the information that is provided in each of the following financial statements: (1) balance sheet, (2) income statement, and (3) statement of cash flows.
(a) The balance sheet shows, at a particular point in time, the amount the firm has invested in assets and how much of those investments are financed with loans (liabilities) and how much are financed with equity (stock). (b) The income statement shows the revenues (sales) that the firm generated during a particular period and the expenses that were incurred during that same period, whether those expense were incurred as the result of normal operations or as the result of how the firm is financed. (c) The statement of cash flows shows how the firm generated cash (inflows) and how the firm used cash (outflows) during a particular accounting period. If the firm uses more cash than it generates through normal operations, it is deficit spending, and deficit spending must be financed with external funds (either stocks or debt).
Crooked Golf's most recent income statement shows that net income was $90,000, depreciation was $25,000, and taxes were $60,000. What was Crooked Golf's net cash flow?
Net cash flow = Net income + Depreciation = $90,000 + $25,000 = $115,000
What kind of financial information is a publicly traded company required to provide to its stockholders? Which financial statement do you think provides the best information for investors?
Publically-traded companies are required to provide adequate financial information to their shareholders. Information generally is provided through financial reports that a company periodically produces, which include a balance sheet, an income statement, a statement of cash flows, and a statement of retained earnings. In addition, the reports published by a company contain discussions of the firm's operations, both present and forecasted.
Robust Robots (RR) recently issued 100,000 shares of common stock at $7 per share. The stock has a par value equal to $3 per share. What amount of the $700,000 that RR raised should be reported in the "common stock at par" account, and what amount should be reported in the "Paid-in capital" account?
Shares issued = 100,000 Price per share = $7 Par value per share = $3 Common stock at par = $300,000 = $3 x 100,000 Paid-in capital = $400,000 = ($7 - $3) x 100,000 = $700,000 - $300,000
Discuss some of the limitations associated with performing ratio (financial statement) analysis. What is the most important ingredient (input) in completing ratio analysis? Explain why.
The most important aspect of ratio analysis is the judgment used when interpreting the results to reach conclusions concerning a firm's current financial position and the direction in which the firm is headed in the future. The analyst should be aware of, and include in the interpretation, the fact that: (1) large firms with many different divisions are difficult to categorize in a single industry; (2) financial statements are reported at historical costs; (3) seasonal factors can distort the ratios; (4) some firms try to "window dress" their financial statements to look good; (5) firms use different accounting procedures to compute inventory values, depreciation, and so on; (6) there might not exist a single value that can be used for comparing firms' ratios (e.g., a current ratio of 2.0 might not be good for some firms); and (7) conclusions concerning the overall financial position of a firm should be based on a representative number of ratios, not a single ratio.
