BF3326 – Corporate Finance

Tutorial Questions
Lecture 2 – Financial Statement and Cash Flows

Answer ALL Questions

1. The annual report contains four basic financial statements: the income statement, the balance sheet,
the cash flow statement, and statement of stockholders' equity.

a. True b. False

2. The primary reason the annual report is important in finance is that it is used by investors when they
form expectations about the firm's future earnings and dividends, and the riskiness of those cash flows.

a. True b. False

3. Companies typically provide four basic financial statements: the fixed income statement, the current
income statement, the balance sheet, and the cash flow statement.

a. True b. False

4. Consider the following balance sheet, for Games Inc. Because Games has $800,000 of retained
earnings, we know that the company would be able to pay cash to buy an asset with a cost of $200,000.

Cash $ 50,000 Accounts payable $ 100,000

Inventory 200,000 Accruals 100,000
Accounts receivable 250,000 Total CL $ 200,000
Total CA $ 500,000 Debt 200,000
Net fixed assets $ 900,000 Common stock 200,000
Retained earnings 800,000
Total assets $1,400,000 Total L & E $1,400,000

a. True b. False

5. Assume that two firms are both following generally accepted accounting principles. Both firms
commenced operations two years ago with $1 million of identical fixed assets, and neither firm sold
any of those assets or purchased any new fixed assets. The two firms would be required to report the
same amount of net fixed assets on their balance sheets as those statements are presented to
investors.

a. True b. False

6. The statement of cash flows has four main sections, one each for operating, investing, and financing
activities, and one that shows a summary of the cash and cash equivalents at the end of the year.

a. True b. False

7. An increase in accounts payable represents an increase in net cash provided by operating activities
just like borrowing money from a bank. An increase in accounts payable has an effect similar to taking
out a new bank loan. However, these two items show up in different sections of the statement of
cash flows.

a. True b. False

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BF3326 – Corporate Finance
Tutorial Questions
Lecture 2 – Financial Statement and Cash Flows

8. The first major section of a typical statement of cash flows is “Operating Activities,” and the first entry
in this section is “Net Income.” Then, also in the first section, we show some items that represent
increases or decreases to cash, and the last entry is called “Net Cash Provided by Operating Activities.”
This number can be either positive or negative, but if it is negative, the firm is almost certain to soon go
bankrupt.

a. True b. False

9. Which of the following statements is CORRECT?

a. The focal point of the income statement is the cash account, because that account cannot be
manipulated by “accounting tricks.”
b. The reported income of two otherwise identical firms cannot be manipulated by different
accounting procedures provided the firms follow generally accepted accounting principles
(GAAP).
c. The reported income of two otherwise identical firms must be identical if the firms are
publicly owned, provided they follow procedures that are permitted by the Securities and
Exchange Commission (SEC).
d. If a firm follows generally accepted accounting principles (GAAP), then its reported net income
will be identical to its reported cash flow.
e. The income statement for a given year, say 2018, is designed to give us an idea of how much
the firm earned during that year.

10. Bauer Software's current balance sheet shows total common equity of $5,125,000. The company has
530,000 shares of stock outstanding, and they sell at a price of $27.50 per share. By how much do
the firm's market and book values per share differ?

11. Brown Fashions Inc.'s December 31, 2018 balance sheet showed total common equity of $4,050,000
and 200,000 shares of stock outstanding. During 2018, the firm had $450,000 of net income, and it
paid out $100,000 as dividends. What was the book value per share at 12/31/18, assuming no
common stock was either issued or retired during 2018?

12. Prezas Company's balance sheet showed total current assets of $4,250, all of which were required in
operations. Its current liabilities consisted of $975 of accounts payable, $600 of 6% short-term notes
payable to the bank, and $250 of accrued wages and taxes. What was its net operating working
capital?

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