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CHAPTER2FinancialStatementsTaxesandCashFlowII.CONCEPTSTANGIBLEASSETd
21.Acomputerusedinabusinessofficebytheofficemanagerisclassifiedas:a.acurrentasset.b.anintangibleasset.c.networkingcapital.d.atangibleasset.e.aninventoryitem.CURRENTASSETSa
22.WhichofthefollowingareincludedincurrentassetsI.equipmentII.inventoryIII.accountspayableIV.casha.IIandIVonlyb.IandIIIonlyc.IIIandIVonlyd.IIIandIVonlye.IIIIIandIVonlyCURRENTLIABILITIESb
23.WhichofthefollowingareincludedincurrentliabilitiesI.notepayabletoasupplierineighteenmonthsII.debtpayabletoamortgagecompanyinninemonthsIII.accountspayabletosuppliersIV.loanpayabletothebankinfourteenmonthsa.IandIIIonlyb.IIandIIIonlyc.IIIandIVonlyd.IIIIIandIVonlye.IIIandIIIonlyNETWORKINGCAPITALc
24.Whichoneofthefollowingstatementsconcerningnetworkingcapitaliscorrecta.Networkingcapitalisnegativewhencurrentassetsexceedcurrentliabilities.b.Networkingcapitalincludescashaccountsreceivablesfixedassetsandaccountspayable.c.Inventoryisapartofnetworkingcapital.d.Thechangeinnetworkingcapitalisequaltothebeginningnetworkingcapitalminustheendingnetworkingcapital.e.Networkingcapitalincludesaccountsfromtheincomestatement.NETWORKINGCAPITALa
25.Whichoneofthefollowingstatementsconcerningnetworkingcapitaliscorrecta.Thegreaterthenetworkingcapitalthegreatertheabilityofafirmtomeetitsshort-termobligations.a.Thechangeinnetworkingcapitalisequaltocurrentassetsminuscurrentliabilities.a.Depreciationmustbeaddedbacktocurrentassetswhencomputingthechangeinnetworkingcapital.a.Networkingcapitalisequaltolong-termassetsminuslong-termliabilities.a.Networkingcapitalisapartoftheoperatingcashflow.BALANCESHEETd
26.Anincreaseintotalassets:a.meansthatnetworkingcapitalisalsoincreasing.a.requiresaninvestmentinfixedassets.a.meansthatshareholders’equitymustalsoincrease.a.mustbeoffsetbyanequalincreaseinliabilitiesandshareholders’equity.a.canonlyoccurwhenafirmhaspositivenetincome.LIQUIDITYc
27.Whichoneofthefollowingaccountsisthemostliquida.inventoryb.buildingb.accountsreceivableb.equipmentb.patentBALANCESHEETb
28.WhichofthefollowingaccountsgenerallyincreaseinvaluewhenafirmsellssharesofitscommonstockatapriceinexcessofparvalueI.retainedearningsII.paid-insurplusII.commonstockII.preferredstocka.IandIIonlyb.IIandIIIonlyc.IIIandIVonlyd.IIIandIIIonlye.IIIIIandIVonlyLIQUIDITYe
29.Whichoneofthefollowingstatementsconcerningliquidityiscorrecta.Ifyoucansellanassettodayitisaliquidasset.a.Ifyoucansellanassetnextyearatapriceequaltoitsactualvaluetheassetishighlyliquid.a.Trademarksandpatentsarehighlyliquid.a.Thelessliquidityafirmhasthelowertheprobabilitythefirmwillencounterfinancialdifficulties.a.Balancesheetaccountsarelistedinorderofdecreasingliquidity.LIQUIDITYd
30.Liquidityis:a.ameasureoftheuseofdebtinafirm’scapitalstructure.b.equaltocurrentassetsminuscurrentliabilities.b.equaltothemarketvalueofafirm’stotalassetsminusitscurrentliabilities.b.valuabletoafirmeventhoughliquidassetstendtobelessprofitabletoown.b.generallyassociatedwithintangibleassets.SHAREHOLDERS’EQUITYd
31.Whichofthefollowingaccountsareincludedinshareholders’equityI.interestpaidII.retainedearningsIII.paidinsurplusIV.long-termdebta.IandIIonlyb.IIandIVonlyc.IandIVonlyd.IIandIIIonlye.IandIIIonlySHAREHOLDERS’EQUITYc
32.Shareholders’equity:a.includescommonstockpaidinsurplusretainedearningsandlong-termdebt.b.onabalancesheetisequivalenttothemarketvalueoftheoutstandingsharesofstock.b.includesallofafirm’searningsretainedbythefirmtodate.b.increasesallelseequalwhenthedividendspaidaregreaterthanthenetincomeforayear.b.includesthebookvalueofanybondsissuedbythefirm.FINANCIALLEVERAGEb
33.Thehigherthedegreeoffinancialleverageemployedbyafirmthe:a.lowertheprobabilitythatthefirmwillencounterfinancialdistress.a.greatertheamountofdebtincurred.a.greaterthenumberofsharesofcommonstockissued.a.greaterthecashflowtocreditorseachyear.e.lowerthepotentialgainstoshareholders.BOOKVALUEb
34.Bookvalue:a.isequivalenttomarketvalueforfirmswithfixedassets.b.isbasedonhistoricalcost.b.generallytendstoexceedmarketvaluewhenfixedassetsareincluded.b.ismoreofafinancialthananaccountingvaluation.b.isadjustedtomarketvaluewheneverthemarketvalueexceedsthestatedbookvalue.MARKETVALUEa
35.Whenmakingfinancialdecisionsrelatedtoassetsyoushould:a.alwaysconsidermarketvalues.a.placemoreemphasisonbookvaluesthanonmarketvalues.a.relyprimarilyonthevalueofassetsasshownonthebalancesheet.a.placeprimaryemphasisonhistoricalcosts.a.onlyconsidermarketvaluesiftheyarelessthanbookvalues.INCOMESTATEMENTd
36.Asseenonanincomestatement:a.interestisdeductedfromincomeandincreasesthetotaltaxesincurred.a.thetaxrateisappliedtotheearningsbeforeinterestandtaxeswhenthefirmhasbothdepreciationandinterestexpenses.a.depreciationisshownasanexpensebutdoesnotaffectthetaxespayable.a.depreciationreducesboththetaxableincomeandthenetincome.a.interestexpenseisaddedtoearningsbeforeinterestandtaxestogettaxableincome.EARNINGSPERSHAREa
37.Theearningspersharewill:a.increaseasnetincomeincreases.b.increaseasthenumberofsharesoutstandingincrease.b.decreaseasthetotalrevenueofthefirmincreases.b.increaseasthetaxrateincreases.b.decreaseasthecostsdecrease.DIVIDENDSPERSHAREe
38.Dividendspershare:a.increaseasthenetincomeincreasesaslongasthenumberofsharesoutstandingremainsconstant.b.decreaseasthenumberofsharesoutstandingdecreaseallelseconstant.b.areinverselyrelatedtotheearningspershare.b.arebaseduponthedividendrequirementsestablishedbyGenerallyAcceptedAccountingProcedures.b.areequaltotheamountofnetincomedistributedtoshareholdersdividedbythenumberofsharesoutstanding.REALIZATIONPRINCIPLEb
39.AccordingtoGenerallyAcceptedAccountingPrinciplesa.incomeisrecordedbasedonthematchingprinciple.a.incomeisrecordedbasedontherealizationprinciple.a.costsarerecordedbasedontheliquidityprinciple.a.netincomeisrecordedbasedontherealizationprinciple.a.depreciationisrecordedasitaffectsthecashflowsofafirm.MATCHINGPRINCIPLEc
40.AccordingtoGenerallyAcceptedAccountingPrinciplescostsare:a.recordedasincurred.b.recordedwhenpaid.c.matchedwithrevenues.d.matchedwithproductionlevels.e.expensedasmanagementdesires.NONCASHITEMSa
41.Depreciation:a.isanoncashexpensethatisrecordedontheincomestatement.b.increasesthenetfixedassetsasshownonthebalancesheet.b.reducesboththenetfixedassetsandthecostsofafirm.b.isanon-cashexpensewhichincreasesthenetoperatingincome.b.decreasesnetfixedassetsnetincomeandoperatingcashflows.FIXEDCOSTSc
42.Fixedcostsintheshort-rungenerallyincludewhichofthefollowingI.manufacturingwagesII.costofmaterialsusedinproductionIII.propertyinsuranceIV.contractuallydeterminedmanagementsalariesa.IandIIonlyb.IIandIIIonlyb.IIIandIVonlyb.IandIVonlyb.IIandIVonlyMARGINALTAXRATEc
43.Whenyouaremakingafinancialdecisionthemostrelevanttaxrateisthe_____rate.a.averageb.fixedb.marginalb.totalb.variableCASHFLOWFROMASSETSe
44.Thecashflowfromassetsisequalto:a.operatingcashflowminusthechangeinnetworkingcapitalplusnetcapitalspending.b.cashflowtocreditorsminusthecashflowtoshareholders.c.earningsbeforeinterestandtaxesplusdepreciationplustaxes.d.earningsbeforeinterestandtaxesplusdepreciationplustaxesminusnetcapitalspendingminusthechangeinnetworkingcapital.e.earningsbeforeinterestandtaxesplusdepreciationminustaxesminusnetcapitalspendingminusthechangeinnetworkingcapital.CASHFLOWFROMASSETSa
45.Anincreaseinwhichoneofthefollowingwillcausethecashflowfromassetstoincreasea.depreciationb.changeinnetworkingcapitalb.networkingcapitalb.taxesb.costsCASHFLOWFROMASSETSb
46.Cashflowfromassetsmustbenegativewhen:a.thefirmhasataxablelossfortheyear.b.thecashflowfromcreditorsandthecashflowfromstockholdersarebothnegative.c.thecashflowfromcreditorsisnegativeandthecashflowfromstockholdersispositive.d.thechangeinnetworkingcapitalexceedsthenetcapitalspending.e.operatingcashflowislessthanthechangeinnetworkingcapital.OPERATINGCASHFLOWd
47.Assumeafirmhasdepreciationtaxesandinterestexpense.Inthiscaseoperatingcashflow:a.isthesameasnetincome.b.isthesameasnetincomeplusdepreciation.b.mustbepositivebecausedepreciationisaddedtothetaxableincome.b.canbepositivenegativeorequaltozero.b.isequaltothecashflowtocreditors.CHANGEINNETWORKINGCAPITALe
48.Afirmstartsitsyearwithapositivenetworkingcapital.Duringtheyearthefirmacquiresmoreshort-termdebtthanitdoesshort-termassets.Thismeansthat:a.theendingnetworkingcapitalwillbenegative.b.bothaccountsreceivableandinventorydecreasedduringtheyear.c.thebeginningcurrentassetswerelessthanthebeginningcurrentliabilities.d.accountspayableincreasedandinventorydecreasedduringtheyear.e.theendingnetworkingcapitalcanbepositivenegativeorequaltozero.NETCAPITALSPENDINGb
49.Netcapitalspending:a.isnegativeifthesaleoffixedassetsisgreaterthantheacquisitionofcurrentassets.b.isequaltozeroifthedecreaseinthefixedassetsaccountisequaltothedepreciationexpensefortheperiod.c.reflectsthenetchangesintotalassetsoverastatedperiodoftime.d.isequivalenttothecashflowfromassets.e.isequaltotheendingnetfixedassetsminusthebeginningnetfixedassets.CASHFLOWTOCREDITORSc
50.Thecashflowtocreditorsincludesthecash:a.receivedbythefirmwhenpaymentsarepaidtosuppliers.a.outflowofthefirmwhennewdebtisacquired.c.outflowwheninterestispaidonoutstandingdebt.d.inflowwhenaccountspayabledecreases.e.receivedwhenlong-termdebtispaidoff.CASHFLOWTOSTOCKHOLDERSa
51.Cashflowtostockholdersmustbepositivewhen:a.thedividendspaidexceedthenetnewequityraised.a.thenetsaleofcommonstockexceedstheamountofdividendspaid.a.noincomeisdistributedbutnewsharesofstockaresold.a.boththecashflowtoassetsandthecashflowtocreditorsarenegative.a.boththecashflowtoassetsandthecashflowtocreditorsarepositive.III.PROBLEMSCURRENTASSETSb
52.Afirmhas$300ininventory$600infixedassets$200inaccountsreceivables$100inaccountspayableand$50incash.Whatistheamountofthecurrentassetsa.$500b.$550c.$600d.$1150e.$1200TOTALLIABILITIESd
53.Afirmhasnetworkingcapitalof$
350.Long-termdebtis$600totalassetsare$950andfixedassetsare$
400.Whatistheamountofthetotalliabilitiesa.$200b.$400c.$600d.$800e.$1200SHAREHOLDERS’EQUITYc
54.Afirmhascommonstockof$100paid-insurplusof$300totalliabilitiesof$400currentassetsof$400andfixedassetsof$
600.Whatistheamountoftheshareholders’equitya.$200b.$400c.$600d.$800e.$1000NETWORKINGCAPITALb
55.Thetotalassetsare$900thefixedassetsare$600long-termdebtis$500andshort-termdebtis$
200.Whatistheamountofnetworkingcapitala.$0b.$100c.$200d.$300e.$400NETWORKINGCAPITALc
56.Shareholders’equityinafirmis$
500.Thefirmowesatotalof$400ofwhich75percentispayablewithinthenextyear.Thefirmhasnetfixedassetsof$
600.Whatistheamountofthenetworkingcapitala.-$200b.-$100c.$0d.$100e.$200LIQUIDITYd
57.Brad’sCo.hasequipmentwithabookvalueof$500thatcouldbesoldtodayata50percentdiscount.Theirinventoryisvaluedat$400andcouldbesoldtoacompetitorforthatamount.Thefirmhas$50incashandcustomersowethem$
300.Whatistheaccountingvalueoftheirliquidassetsa.$50b.$350c.$700d.$750e.$1000BOOKVALUEc
58.Martha’sEnterprisesspent$2400topurchaseequipmentthreeyearsago.Thisequipmentiscurrentlyvaluedat$1800ontoday’sbalancesheetbutcouldactuallybesoldfor$
2000.Networkingcapitalis$200andlong-termdebtis$
800.Whatisthebookvalueofshareholders’equitya.$200a.$800a.$1200a.$1400e.Theanswercannotbedeterminedfromtheinformationprovided.MARKETVALUEb
59.RecentlytheownerofMartha’sWaresencounteredseverelegalproblemsandistryingtosellherbusiness.Thecompanybuiltabuildingatacostof$
1.2millionthatiscurrentlyappraisedat$
1.4million.Theequipmentoriginallycost$700000andiscurrentlyvaluedat$
400000.Theinventoryisvaluedonthebalancesheetat$350000buthasmarketvalueofonlyone-halfofthatamount.Theownerexpectstocollect95percentofthe$200000inaccountsreceivable.Thefirmhas$10000incashandowesatotalof$
1.4million.Thelegalproblemsarepersonalandunrelatedtotheactualbusiness.Whatisthemarketvalueofthisfirma.$575000a.$775000a.$950000a.$1150000a.$1175000NETINCOMEa
60.Ivan’sInc.paid$500individendsand$600ininterestthispastyear.Commonstockincreasedby$200andretainedearningsdecreasedby$
100.Whatisthenetincomefortheyeara.$400a.$500a.$600a.$800e.$1000NETINCOMEb
61.Art’sBoutiquehassalesof$640000andcostsof$
480000.Interestexpenseis$40000anddepreciationis$
60000.Thetaxrateis34%.Whatisthenetincomea.$20400b.$39600c.$50400d.$79600e.$99600MARGINALTAXRATEc
62.Giventhetaxratesasshownwhatistheaveragetaxrateforafirmwithtaxableincomeof$126500TaxableIncomeTaxRate$0-5000015%50001-7500025%75001-10000034%100001-33500039%a.
21.38percenta.
23.88percenta.
25.76percenta.
34.64percente.
39.00percentTAXESd
63.Thetaxratesareasshown.Yourfirmcurrentlyhastaxableincomeof$
79400.Howmuchadditionaltaxwillyouoweifyouincreaseyourtaxableincomeby$21000TaxableIncomeTaxRate$0-5000015%50001-7500025%75001-10000034%100001-33500039%a.$7004a.$7014a.$7140a.$7160a.$7174EARNINGSBEFOREINTERESTANDTAXESc
64.Tim’sPlayhousepaid$155individendsand$220ininterestexpense.Theadditiontoretainedearningsis$325andnetnewequityis$
50.Thetaxrateis25percent.Salesare$1600anddepreciationis$
160.Whataretheearningsbeforeinterestandtaxesa.$480a.$640a.$860a.$1020a.$1440OPERATINGCASHFLOWd
65.Yourfirmhasnetincomeof$198ontotalsalesof$
1200.Costsare$715anddepreciationis$
145.Thetaxrateis34percent.Thefirmdoesnothaveinterestexpenses.Whatistheoperatingcashflowa.$93a.$241a.$340a.$383e.$485NETCAPITALSPENDINGc.
66.Teddy’sPillowshasbeginningnetfixedassetsof$480andendingnetfixedassetsof$
530.Assetsvaluedat$300weresoldduringtheyear.Depreciationwas$
40.Whatistheamountofnetcapitalspendinga.$10a.$50a.$90a.$260a.$390CHANGEINNETWORKINGCAPITALb
67.Atthebeginningoftheyearafirmhascurrentassetsof$380andcurrentliabilitiesof$
210.Attheendoftheyearthecurrentassetsare$410andthecurrentliabilitiesare$
250.Whatisthechangeinnetworkingcapitala.-$30a.-$10a.$0a.$10e.$30CASHFLOWTOCREDITORSe
68.Atthebeginningoftheyearlong-termdebtofafirmis$280andtotaldebtis$
340.Attheendoftheyearlong-termdebtis$260andtotaldebtis$
350.Theinterestpaidis$
30.Whatistheamountofthecashflowtocreditorsa.-$50a.-$20a.$20a.$30e.$50CASHFLOWTOCREDITORSa
69.Pete’sBoatshasbeginninglong-termdebtof$180andendinglong-termdebtof$
210.Thebeginningandendingtotaldebtbalancesare$340and$360respectively.Theinterestpaidis$
20.Whatistheamountofthecashflowtocreditorsa.-$10a.$0a.$10a.$40e.$50CASHFLOWTOSTOCKHOLDERSa
70.PeggyGrey’sCookieshasnetincomeof$
360.Thefirmpaysout40percentofthenetincometoitsshareholdersasdividends.Duringtheyearthecompanysold$80worthofcommonstock.Whatisthecashflowtostockholdersa.$64a.$136a.$144a.$224e.$296CASHFLOWTOSTOCKHOLDERSa
71.Thompson’sJetSkishasoperatingcashflowof$
218.Depreciationis$45andinterestpaidis$
35.Anettotalof$69waspaidonlong-termdebt.Thefirmspent$180onfixedassetsandincreasednetworkingcapitalby$
38.Whatistheamountofthecashflowtostockholdersa.-$104a.-$28a.$28a.$114e.$142Thefollowingbalancesheetandincomestatementshouldbeusedforquestions#72through#80:NaborsInc.2005IncomeStatement$inmillionsNetsales$9610Less:Costofgoodssold6310Less:Depreciation1370Earningsbeforeinterestandtaxes1930Less:Interestpaid630TaxableIncome$1300Less:Taxes455Netincome$845NaborsInc.2004and2005BalanceSheets$inmillions2004200520042005Cash$310$405Accountspayable$2720$2570Accountsrec.26403055Notespayable1000Inventory32753850Total$2820$2570Total$6225$7310Long-termdebt78758100Netfixedassets1096010670Commonstock50005250Retainedearnings14902060Totalassets$17185$17980Totalliab.equity$17185$17980CHANGEINNETWORKINGCAPITALc
72.Whatisthechangeinthenetworkingcapitalfrom2004to2005a.$1235a.$1035a.$1335a.$3405a.$4740NONCASHEXPENSESd
73.Whatistheamountofthenon-cashexpensesfor2005a.$570a.$630a.$845a.$1370e.$2000NETCAPITALSPENDINGc
74.Whatistheamountofthenetcapitalspendingfor2005a.-$290a.$795a.$1080a.$1660a.$2165OPERATINGCASHFLOWd
75.Whatistheoperatingcashflowfor2005a.$845a.$1930a.$2215a.$2845a.$3060CASHFLOWFROMASSETSa
76.Whatisthecashflowfromassetsfor2005a.$430a.$485a.$1340a.$2590a.$3100NETNEWBORROWINGe
77.Whatistheamountofnetnewborrowingfor2005a.-$225a.-$25a.$0a.$25a.$225CASHFLOWTOCREDITORSd
78.Whatisthecashflowtocreditorsfor2005a.-$405a.-$225a.$225a.$405a.$630DIVIDENDSPAIDb
79.Whatistheamountofdividendspaidin2005a.$25a.$275a.$570a.$625a.$845CASHFLOWTOSTOCKHOLDERSc
80.Whatisthecashflowtostockholdersfor2005a.-$250b.-$25c.$25d.$250e.$275Thefollowinginformationshouldbeusedforquestions#81through#88:KnickerdoodlesInc.20042005Sales$740$785COGS430460Interest3335Dividends1617Depreciation250210Cash7075Accountsreceivables563502Currentliabilities390405Inventory662640Long-termdebt340410Netfixedassets16801413Commonstock700235Taxrate35%35%NETWORKINGCAPITALd
81.Whatisthenetworkingcapitalfor2005a.$345a.$405a.$805a.$812a.$1005CHANGEINNETWORKINGCAPITALa
82.Whatisthechangeinnetworkingcapitalfrom2004to2005a.-$93a.-$7a.$7a.$85a.$97NETCAPITALSPENDINGb
83.Whatisnetcapitalspendingfor2005a.-$250a.-$57a.$0a.$57a.$477OPERATINGCASHFLOWb
84.Whatistheoperatingcashflowfor2005a.$143a.$297a.$325a.$353a.$367CASHFLOWFROMASSETSd
85.Whatisthecashflowfromassetsfor2005a.$50a.$247a.$297a.$447a.$517NETNEWBORROWINGd
86.Whatisnetnewborrowingfor2005a.-$70a.-$35a.$35a.$70a.$105CASHFLOWTOCREDITORSb
87.Whatisthecashflowtocreditorsfor2005a.-$170a.-$35a.$135a.$170a.$205CASHFLOWTOSTOCKHOLDERSd
88.Whatisthecashflowtostockholdersfor2005a.$408a.$417a.$452a.$482a.$503Thefollowinginformationshouldbeusedforquestions#89through#91:2005Costofgoodssold$3210Interest215Dividends160Depreciation375Changeinretainedearnings360Taxrate35%TAXABLEINCOMEe
89.Whatisthetaxableincomefor2005a.$360a.$520a.$640a.$780a.$800OPERATINGCASHFLOWd
90.Whatistheoperatingcashflowfor2005a.$520a.$800a.$1015a.$1110a.$1390SALESc
91.Whatarethesalesfor2005a.$4225a.$4385a.$4600a.$4815e.$5000IV.ESSAYSLIQUIDASSETS
92.WhatisaliquidassetandwhyisitnecessaryforafirmtomaintainareasonablelevelofliquidassetsLiquidassetsarethosethatcanbesoldquicklywithlittleornolossinvalue.Afirmthathassufficientliquiditywillbelesslikelytoexperiencefinancialdistress.OPERATINGCASHFLOW
93.WhyisinterestexpenseexcludedfromtheoperatingcashflowcalculationOperatingcashflowisdesignedtorepresentthecashflowafirmgeneratesfromitsday-to-dayoperatingactivities.Interestexpensearisesoutofafinancingchoiceandthusshouldbeconsideredasacashflowtocreditors.CASHFLOWANDACCOUNTINGSTATEMENTS
94.Explainwhytheincomestatementisnotagoodrepresentationofcashflow.Mostincomestatementscontainsomenoncashitemssothesemustbeaccountedforwhencalculatingcashflows.MoreimportantlyhoweversinceGAAPisusedtocreateincomestatementsrevenuesandexpensesarebookedwhentheyaccruenotwhentheircorrespondingcashflowsoccur.BOOKVALUEANDMARKETVALUE
95.Discussthedifferencebetweenbookvaluesandmarketvaluesonthebalancesheetandexplainwhichismoreimportanttothefinancialmanagerandwhy.Theaccountsonthebalancesheetaregenerallycarriedathistoricalcostnotmarketvalues.Althoughthebookvalueofcurrentassetsandcurrentliabilitiesmaycloselyapproximatemarketvaluesthesamecannotbesaidfortherestofthebalancesheetaccounts.Ultimatelythefinancialmanagershouldfocusonthefirm’sstockpricewhichisamarketvaluemeasure.Hencemarketvaluesaremoremeaningfulthanbookvalues.ADDITIONTORETAINEDEARNINGS
96.Notethatinallofourcashflowcomputationstodeterminecashflowfromassetsweneverincludetheadditiontoretainedearnings.WhynotIsthisanoversightTheadditiontoretainedearningsisnotacashflow.Itissimplyanaccountingentrythatreconcilesthebalancesheet.Anyadditionstoretainedearningswillshowupascashflowchangesinotherbalancesheetaccounts.DEPRECIATIONANDCASHFLOW
97.Notethatweaddeddepreciationbacktooperatingcashflowandtoadditionstofixedassets.WhyadditbacktwiceIsn’tthisdouble-countingInbothcasesdepreciationisaddedbackbecauseitwaspreviouslysubtractedwhenobtainingendingbalancesofnetincomeandfixedassets.Alsosincedepreciationisanoncashexpenseweneedtoadditbackinbothinstancessothereisnodoublecounting.TAXLIABILITIESANDCASHFLOW
98.Sometimeswhenbusinessesarecriticallydelinquentontheirtaxliabilitiesthetaxauthoritycomesinandliterallyseizesthebusinessbychasingalloftheemployeesoutofthebuildingandchangingthelocks.WhatdoesthistellyouabouttheimportanceoftaxesrelativetoourdiscussionofcashflowWhymightabusinessownerwanttoavoidsuchanoccurrenceTaxesmustbepaidincashandinthiscasetheyareoneofthemostimportantcomponentsofcashflow.Thereputationofabusinesscanundergoirreparableharmifwordgetsoutthatthetaxauthoritieshaveconfiscatedthebusinessevenifonlyforacoupleofhoursuntilthebusinessownercancomeupwiththemoneytoclearupthetaxproblem.Thebottomlineisiftheownercan’tcomeupwiththecashthetaxauthorityhaseffectivelyputthemoutofbusiness.CASHFLOWFROMASSETS
99.Interpretinwordswhatcashflowfromassetsrepresentsbydiscussingoperatingcashflowchangesinnetworkingcapitalandadditionstofixedassets.Operatingcashflowisthecashflowafirmgeneratesfromitsday-to-dayoperations.Inotherwordsitisthecashinflowgeneratedasaresultofputtingthefirm’sassetstowork.Changesinnetworkingcapitalandfixedassetsrepresentinvestmentsafirmmakesintheseassets.Thatisafirmtypicallytakessomeofthecashflowitgeneratesfromusingassetsandreinvestsitinnewassets.Cashflowfromassetsthenisthecashflowafirmgeneratesbyemployingitsassetsnetofanyacquisitions.。