Chapter 2

Chapter 2 - CHAPTER 2 THE FINANCIAL STATEMENTS BRIEF...

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CHAPTER 2 THE FINANCIAL STATEMENTS BRIEF EXERCISES BE2–1 2006 2006 2006 Beginning Ending Retained 2006 2006 2006 Retained Earnings + Revenues Expenses Dividends = Earnings \$21.1 + \$35 \$29.4 X = \$24.8 X = \$1.9 2006 Dividends as a percentage of 2006 net income: 2006 Dividends = \$ 1.9 = 33.9% 2006 Net income (\$35-\$29.4) \$ 5.6 BE2–2 (1) Current Liabilities financed \$30 billion of the assets. Current Liabilities divided by Total assets = \$30/\$52 = 57.7% (2) Long-term debt financed \$17 billion of the assets. Long-term debt divided by total assets = \$17/\$52 = 32.7% (3) Stockholders’ equity financed \$5 billion of the assets. Stockholders’ equity divided by total assets = \$5/\$52 = 9.6% BE2–3 (a) Working capital = current assets – current liabilities. Boeing’s current assets total \$23 billion, less \$30 billion of current liabilities, gives the company negative working capital of \$7 billion. Another measure of solvency would be the current ratio. The current ratio is current assets divided by current liabilities or \$23 billion divided by \$30 billion = 0.77. Both measures indicate that Boeing appears to have a solvency problem. Current assets are not sufficient to cover current liabilities. Under existing circumstances the Company will have to look to other sources to pay its current obligations. (b) No, Boeing has \$11.7 billion of liquid current assets (cash, short term investments, and accounts receivable) but it has \$30 billion of current liabilities. (c) Boeing would be more solvent if accounts receivable were \$8.1 billion and inventory was \$5.3 billion. Accounts receivable are closer to cash than inventory. This means that accounts receivable are expected to be converted to cash in a shorter period of time than inventory. 1

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BE2-4 2006 2005 2004 Net cash flow from operating activities. .................. \$ 15,615 \$ 12,974 \$ 10,950 Net cash flow from investing activities. ................... (8,293) (978) (20,747) Net cash flow from financing activities. ................... (6,128) (11,532 ) (5,751 ) Net change in cash. ................................................ \$ 1,194 \$ 464\$(15,548) Cash at beginning of period. ................................... 1,224 760 16,308 Cash at end of period………………………………. . \$ 2,418 \$ 1,224 \$ 760 AT & T’s cash management activities over the three-year period of 2006, 2005, and 2004 appear to be extremely good. The company is generating significant amounts of cash flow from operating activities, increasing each year. AT & T is then able to reinvest substantial amounts in its asset base. At the same time AT & T is also able to fund its financing activities from its operating cash flow. The large amount of funds being used in investing activities indicate that AT & T is growing its business. EXERCISES
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Chapter 2 - CHAPTER 2 THE FINANCIAL STATEMENTS BRIEF...

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