pratt_8e_chapter_2_solns - CHAPTER 2 THE FINANCIAL...

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CHAPTER 2 THE FINANCIAL STATEMENTS BRIEF EXERCISES BE2–1 2008 2008 2008 Beginning Ending Retained 2008 2008 2008 Retained Earnings + Revenues Expenses Dividends = Earnings $28.2 + $43.3 $38.2 X = $30.6 X = $2.7 2008 Dividends as a percentage of 2008 net income: 2008 Dividends = $ 2.7 = 52.9% 2008 Net income ($43.3-$38.2) $ 5.1 BE2–2 (1) Current Liabilities financed $32 billion of the assets. Current Liabilities divided by Total assets = $32/$59 = 54.2% (2) Long-term debt financed $18 billion of the assets. Long-term debt divided by total assets = $18/$59 = 30.5% (3) Stockholders’ equity financed $9 billion of the assets. Stockholders’ equity divided by total assets = $9/$59 = 15.3% BE2–3 (a) Working capital = current assets – current liabilities. Boeing’s current assets total $27 billion, less $32 billion of current liabilities, gives the company negative working capital of $5 billion. Another measure of solvency would be the current ratio. The current ratio is current assets divided by current liabilities or $27 billion divided by $32 billion = 0.84. 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 $15 billion of liquid current assets (cash, short term investments, and accounts receivable) but it has $32 billion of current liabilities. (c) Boeing would be more solvent if accounts receivable were $9.6 billion and inventory was $5.7 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
BE2-4 2008 2007 2006 Net cash flow from operating activities .................. $ 33,656 $ 34,242 $ 15,688 Net cash flow from investing activities ................... (29,143) (18,616) (8,366) Net cash flow from financing activities ................... (4,691) (16,074 ) (6,128 ) Net change in cash ................................................. $ ( 178) $ (448) $ 1,194 Cash at beginning of period ................................... 1,970 2,418 1,224 Cash at end of period………………………………. $ 1,792 $ 1,970 $ 2,418 AT & T’s cash management activities over the three-year period of 2006 - 2008 appear to be extremely strong. The company is generating significant amounts of cash flow from operating activities, with 2007 and 2008 at roughly twice the level of 2006. 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 indicates that AT & T is growing its capital-intensive business. BE2–5 IFRS Format Non-current assets 154,073 Current assets 115,397 Less: Current liabilities (94,384) Total 175,086 Non-current liabilities 49,118 Equity 125,968 Total 175,086 GAAP Format Non-current assets 154,073 Current assets 115,397 Total 269,470 Current liabilities 94,384 Non-current liabilities 49,118 Equity 125,968 Total 269,470 Many non-US companies begin with non-current assets, add current assets, and then subtract current liabilities to reflect the resources available to generate revenues and profits. The IFRS balance sheet then lists non-current liabilities and shareholders’ equity, which represent the financing sources of company resources; this amount is often labeled “capital employed.”

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