solutions_to_chapter_3 - Solutions to Chapter 3 Accounting...

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Accounting and Finance 1. Assets Shareholders’ Equity Cash $ 10,000 Accounts payable $ 17,000 Accounts receivable 22,000 Long-term debt 170,000 Inventory 200,000 Shareholders’ equity 145,000 100,000 Total assets $332,000 Shareholders’ equity $332,000 3. Accounting revenues and expenses can differ from cash flows because some items included in the computation of revenues and expenses do not entail immediate cash flows. For example, sales made on credit are considered revenue even though cash is not collected until the customer makes a payment. Also, depreciation expense reduces net income, but does not entail a cash outflow. Conversely, some cash flows are not included in revenues or expenses. For example, collection of accounts receivable results in a cash inflow but is not revenue. Purchases of inventory require cash outlays, but are treated as investments in working capital, not as expenses. 4. Working capital ought to be increasing. The firm will be building up stocks of inventory as it ramps up production. In addition, as sales increase, accounts receivable will increase rapidly. While accounts payable will probably also increase, the increase in accounts receivable will tend to dominate since sales prices exceed input costs 8. a.Cash will increase as one current asset (inventory) is exchanged for another (cash). b. Cash will increase. The machine will bring in cash when it is sold, but the lease payments will be made over several years. c.The firm will use cash to buy back the shares from existing shareholders. Cash balance will decrease. 9. Net income = Increase in retained earnings + dividends $900,000 = ($3,700,000 - $3,400,000) + dividends dividends = $600,000 12. Sales
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This note was uploaded on 03/04/2009 for the course BUSINESS 210 taught by Professor Tennyson during the Winter '07 term at Santa Clara.

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solutions_to_chapter_3 - Solutions to Chapter 3 Accounting...

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