Ch2 homework answer

Ch2 homework answer - Chapter 2, CTCR 1. Liquidity measures...

Info iconThis preview shows pages 1–3. Sign up to view the full content.

View Full Document Right Arrow Icon
Chapter 2, CTCR 1. Liquidity measures how quickly and easily an asset can be converted to cash without significant loss in value. It’s desirable for firms to have high liquidity so that they can more safely meet short-term creditor demands. However, since liquidity also has an opportunity cost associated with it—namely that higher returns can generally be found by investing the cash into productive assets—low liquidity levels are also desirable to the firm. It’s up to the firm’s financial management staff to find a reasonable compromise between these opposing needs. 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. Historical costs can be objectively and precisely measured, whereas market values can be difficult to estimate, and different analysts would come up with different numbers. Thus, there is a tradeoff between relevance (market values) and objectivity (book values). 4. Depreciation is a non-cash deduction that reflects adjustments made in asset book values in accordance with the matching principle in financial accounting. Interest expense is a cash outlay, but it’s a financing cost, not an operating cost. 6. For a successful company that is rapidly expanding, capital outlays would typically be large, possibly leading to negative cash flow from assets. In general, what matters is whether the money is spent wisely, not whether cash flow from assets is positive or negative. 7. It’s probably not a good sign for an established company, but it would be fairly ordinary for a start-up, so it depends. 1
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
1. The balance sheet for the company will look like this: Balance sheet Current assets $3,400 Current liabilities $1,900 Net fixed assets 7,100 Long-term debt 5,200 Owner's equity 3,400 Total assets $10,500 $10,500 The owner’s equity is a plug variable. We know that total assets must equal total liabilities & owner’s equity. Total liabilities and equity is the sum of all debt and equity, so if we subtract debt from total liabilities and owner’s equity, the remainder must be the equity balance, so:
Background image of page 2
Image of page 3
This is the end of the preview. Sign up to access the rest of the document.

This note was uploaded on 04/30/2008 for the course BCOR 2200 taught by Professor Tomnelson during the Fall '08 term at Colorado.

Page1 / 7

Ch2 homework answer - Chapter 2, CTCR 1. Liquidity measures...

This preview shows document pages 1 - 3. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online