If A Typical Firm Reports $ 20 Million Of Retained Earnings On Its Balance Sheet?
Question 3-3
If a “typical” firm reports $20 million of retained earnings on its balance sheet, could its directors declare a $20 million cash dividend without having any qualms about what they were doing? Explain your answer.
Its directors could declare a $20 million cash dividend without having any qualms about what they were doing, because retained earnings may not held as cash. Retained earnings represent the cumulative total of all earnings kept by the company during its life. Therefore, $20 million would be an investment in all of the firm’s assets.
Question 3-5
Financial statements are based on generally accepted accounting principles (GAAP) and are audited by CPA firms. Do investors need to worry about the validity of those statements? …show more content…
What do you think the average household balance sheet looks like today? Explain your answer.
I think the average household balance sheet will improved today, because of the increased in-home prices, the large run-up in the stock market.
Question 3-10
Explain the following statement: Our tax rates are progressive.
The tax rates are progressive, the higher one’s income, and the larger percentage paid in taxes.
Problem 3-1
BALANCE SHEET The assets of Dallas and Associates consist entirely of current assets and net plant and equipment. The firm has total assets of $2.5 million and net plant and equipment equals $2 million. It has notes payable of $150,000, long-term debt of $750,000, and total common equity of $1.5 million. The firm does have accounts payable and accruals on its balance sheet. The firm only finances with debt and common equity, so it has no preferred stock on its balance sheet.
a. What is the company’s total debt?
Total debt= long-term debt + Notes payable = $750,000 + $150,000 = $ 900,000
b. What is the amount of total liabilities and equity that appears on the firm’s balance sheet?
The amount of total liabilities and equity that appears on the firm’s balance sheet is …show more content…
What is the firm’s net working capital? Net Working Capital= Current assets- Current liabilities = $500,000- $250,000= $250,000
g. What is the firm’s net operating working capital?
Net operating working capital= Current assets- (Current liabilities- Notes payable) = $500,000- ($250,000- $150,000) = $400,000
h. What is the explanation for the difference in your answers to part f and g?
Net operating working capital – Net working capital= $400,000- $250,000 = $150,000
Problem 3-2
INCOME STATEMENT Little Books Inc. recently reported $3 million of net income. Its EBIT was $6 million, and its tax rate was 40%. What was its interest expense? Hint: Write out the heading for an income statement, and fill in the known values. Then divide $3 million of net income by (1-T) =0.6 to find the pretax income. The difference between EBIT and taxable income must be interest expense. Use this same procedure to complete similar problems.
Earnings before interest taxes = $6,000,000 Tax rate = 0.04 Interest Expense = X
EBT= 3,000,000/ (1- T) = $3,000,000 / (1-0.04) = $ 3,000,000 / 0.06 = $
If a “typical” firm reports $20 million of retained earnings on its balance sheet, could its directors declare a $20 million cash dividend without having any qualms about what they were doing? Explain your answer.
Its directors could declare a $20 million cash dividend without having any qualms about what they were doing, because retained earnings may not held as cash. Retained earnings represent the cumulative total of all earnings kept by the company during its life. Therefore, $20 million would be an investment in all of the firm’s assets.
Question 3-5
Financial statements are based on generally accepted accounting principles (GAAP) and are audited by CPA firms. Do investors need to worry about the validity of those statements? …show more content…
What do you think the average household balance sheet looks like today? Explain your answer.
I think the average household balance sheet will improved today, because of the increased in-home prices, the large run-up in the stock market.
Question 3-10
Explain the following statement: Our tax rates are progressive.
The tax rates are progressive, the higher one’s income, and the larger percentage paid in taxes.
Problem 3-1
BALANCE SHEET The assets of Dallas and Associates consist entirely of current assets and net plant and equipment. The firm has total assets of $2.5 million and net plant and equipment equals $2 million. It has notes payable of $150,000, long-term debt of $750,000, and total common equity of $1.5 million. The firm does have accounts payable and accruals on its balance sheet. The firm only finances with debt and common equity, so it has no preferred stock on its balance sheet.
a. What is the company’s total debt?
Total debt= long-term debt + Notes payable = $750,000 + $150,000 = $ 900,000
b. What is the amount of total liabilities and equity that appears on the firm’s balance sheet?
The amount of total liabilities and equity that appears on the firm’s balance sheet is …show more content…
What is the firm’s net working capital? Net Working Capital= Current assets- Current liabilities = $500,000- $250,000= $250,000
g. What is the firm’s net operating working capital?
Net operating working capital= Current assets- (Current liabilities- Notes payable) = $500,000- ($250,000- $150,000) = $400,000
h. What is the explanation for the difference in your answers to part f and g?
Net operating working capital – Net working capital= $400,000- $250,000 = $150,000
Problem 3-2
INCOME STATEMENT Little Books Inc. recently reported $3 million of net income. Its EBIT was $6 million, and its tax rate was 40%. What was its interest expense? Hint: Write out the heading for an income statement, and fill in the known values. Then divide $3 million of net income by (1-T) =0.6 to find the pretax income. The difference between EBIT and taxable income must be interest expense. Use this same procedure to complete similar problems.
Earnings before interest taxes = $6,000,000 Tax rate = 0.04 Interest Expense = X
EBT= 3,000,000/ (1- T) = $3,000,000 / (1-0.04) = $ 3,000,000 / 0.06 = $