Part 1: Multiple Choice & Short Answer

1. An analyst has gathered the following information about Barnstabur, Inc., for the year:
Reported net income of $30,000. 5,000 shares of common stock and 2,000 shares of 8%, $90 par
preferred stock outstanding during the whole year. During the year, Barnstabur issued at par, $60,000
of 6.0% convertible bonds, with each of the 60 bonds convertible into 110 shares of the Barnstabur
common stock.
If Barnstabur's effective tax rate is 40%, what will Barnstabur report for diluted earnings per share
(EPS)?
2. Protocol, Inc.'s net income for 2005 was $4,800,000. Protocol had 800,000 shares of common stock
outstanding for the entire year. The tax rate was 40 percent. The average share price in 2005 was
$37.00. Protocol had 5,000 8 percent $1,000 par value convertible bonds that were issued in 2004.
Each bond is convertible into 25 shares of common stock. Protocol, Inc.'s basic and diluted earnings
per share for 2005 were closest to:
Basic EPS Diluted EPS
$6.00 $5.45
$5.19 $4.92
$6.00 $4.92

3. Define internal and external sources of liquidity. What is a material deficiency in liquidity? If a firm
has a material deficiency in liquidity what should be reported in the management discussion and analysis?
4. Using the following information analyze the accounts receivable and the allowance for doubtful
accounts for this company:

20X9 20X8
Sales $8,800 $5,800
Accounts receivable, net 1,450 1,070
Allowance for doubtful accounts 22 26

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Exhibit 1 presents a statement of cash flows for Starbucks for 2006, 2007, and 2008.

Required

a. Explain why equity in income of investees appears as a subtraction when net income is converted to cash flow
from operations.

b. Compute the amount of cash received from investees as dividends each year. To answer this question, you
need to refer to the income statement of Starbucks in Exhibit 2

c. Explain why stock-based compensation appears as an addition to net income to compute cash flow from
operations.

d. Discuss the relation between net income and cash flow from operations for each of the three years.

e. Discuss the relation between cash flows from operating, investing, and financing activities for each of the three
years.

f. Refer to the income statement for Starbucks in Exhibit 1.27 in Chapter 1 (Integrative Case 1.1). Compute the
amount of EBITDA for 2006, 2007, and 2008.

g. Discuss the relationships among net income, non-working capital adjustments, working capital adjustments,
operating cash flows, and EBITDA for the three years. Are the patterns similar or different? What are the primary
determinants of the differences between the summary measures net income, operating cash flows, and EBITDA?
h.

The income statement in Exhibit 2 shows However, the statement of cash flows shows
depreciation and amortization expense as addbacks for depreciation and amortization as
follows: follows:

Explain why the amount on the income statement differs from the amount on the statement of cash flows each
year

Starbucks Corporation Comparative Statements of Cash Flows (amounts in millions):

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Exhibit 2: Starbucks Corporation Comparative Income Statements (amounts in millions except per share figures)