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Unformatted text preview: CHAPTER TWO: QUESTIONS & ANSWERS 2-1 The four financial statements contained in most annual reports are the balance sheet, income statement, statement of retained earnings, and the statement of cash flows. 2-2 It is not the case that a board can announce a $20 million dividend simply because the balance sheet shows retained earnings of $20 million. First, the retained earnings are probably not being held in the form of cash. Second, retained earnings figure represents instead the reinvestment of earnings by the firm. Consequently, the $20 million dollar retained earnings would be an investment in all of the firms assets. 2-3 The BALANCE SHEET show the firms financial position on a specific date, for example, December 31, 2004. It shows each account balance at that particular point in time . For instance, the cash account shown on the balance sheet would represent the cash the firm has on hand and in the bank on December 31, 2004. The INCOME STATEMENT , on the other hand, reports on the firms operations over a period of time , for example, over the last 12 months. It reports revenues and expenses that the firm has incurred over that particular time period. For instance, the sales figures reported on the income statement for the period ending December 31, 2004 would represent the firms sales over the period from January 1, 2004 through December 31, 2004, not just sales for December 31, 2004. 2-4...
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This note was uploaded on 04/15/2008 for the course FIN 321 taught by Professor Kelley during the Spring '08 term at Loyola Maryland.
- Spring '08