# Modern Finance Key

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CHAPTER 2 FINANCIAL STATEMENTS AND CASH FLOW Answers to Concepts Review and Critical Thinking Questions 1. True. Every asset can be converted to cash at some price. However, when we are referring to a liquid asset, the added assumption that the asset can be quickly converted to cash at or near market value is important. 2. The recognition and matching principles in financial accounting call for revenues, and the costs associated with producing those revenues, to be “booked” when the revenue process is essentially complete, not necessarily when the cash is collected or bills are paid. Note that this way is not necessarily correct; it’s the way accountants have chosen to do it. 3. The bottom line number shows the…show more content…
We also know that TL &amp; OE is equal to current liabilities plus long-term debt plus owner’s equity, so owner’s equity is: OE = \$32,700 –12,900 – 4,400 = \$15,400 NWC = CA – CL = \$5,700 – 4,400 = \$1,300 2. The income statement for the company is: Income Statement Sales \$387,000 Costs 175,000 Depreciation 40,000 EBIT \$172,000 Interest 21,000 EBT \$151,000 Taxes 52,850 Net income \$ 98,150 One equation for net income is: Net income = Dividends + Addition to retained earnings Rearranging, we get: Addition to retained earnings = Net income – Dividends Addition to retained earnings = \$98,150 – 30,000 Addition to retained earnings = \$68,150 3. To find the book value of current assets, we use: NWC = CA – CL. Rearranging to solve for current assets, we get: CA = NWC + CL = \$800,000 + 2,400,000 = \$3,200,000 The market value of current assets and net fixed assets is given, so: Book value CA = \$3,200,000 Market value CA = \$2,600,000 Book value NFA = \$5,200,000 Market value NFA = \$6,500,000 Book value assets = \$8,400,000 Market value assets = \$9,100,000 4. Taxes = 0.15(\$50,000) + 0.25(\$25,000) + 0.34(\$25,000) + 0.39(\$273,000 – 100,000) Taxes = \$89,720 The average tax rate is the total tax paid divided by net income, so: Average tax rate =