reinforcingunderstandingofthefoundationalprinciplesofbiochemistryandtheirsignificanceinbiologicalprocesses.Chapter2providesacomprehensiveintroductiontothechemicalfoundationsthatunderpinbiologicalsystems.Itestablishesacruci
erstandingofhowchemicalprinciplesgovernthestructure,function,andinteractionsofbiologicalmoleculesessentialforlife.Thisknowledgeservesasabasisforfurtherexplorationintocellularprocesses,genetics,andphysiologicalmechanismscovere
bsequentchaptersofthetextbook.IfyouhavespecificquestionsaboutanyofthesetopicsorwouldlikemoredetailedinformationonaparticularaspectofChapter2,feelfreetoask!
,andtheCellTheory.**CellStructure**:Explorationofthestructureoftypicaleukaryoticcells,including:**CellMembrane**:Structure,composition(lipidbilayer,proteins),functionsincelltransport,signaling,andrecognition.**Cytoplasm**:C
sition,organellessuspendedwithin(e.g.,cytoskeleton,ribosomes).**Nucleus**:Structure,functions(DNAstorage,transcription,regulationofcellactivities).**Organelles**:Detailedexaminationoforganellessuchasmitochondria,endoplasmicre
m,Golgiapparatus,lysosomes,andtheirrolesincellularprocesses.**ProkaryoticCells**:Comparisonofprokaryoticandeukaryoticcellstructures,emphasizingdifferencesinorganelles,geneticmaterial(nonucleusinprokaryotes),andcellularproc
**CellularOrganizationandFunction**:Integrationofcellularcomponentsandorganellestosupportcellularfunctionssuchasmetabolism,proteinsynthesis,energyproduction(e.g.,ATPsynthesis),andmaintenanceofhomeostasis.**CellularTran
**:Mechanismsofcellulartransport,including:**PassiveTransport**:Diffusion,osmosis,facilitateddiffusion.**ActiveTransport**:Ionpumps,carrierproteins,endocytosis,exocytosis.**BulkTransport**:Phagocytosis,pinocytosis.**CellCom
ication**:Overviewofcellularcommunicationprocesses,including:**ReceptorProteins**:Recognitionofsignalingmolecules(ligands).**SignalTransduction**:Transmissionofsignalswithincells(e.g.,secondmessengers).**CellSignalingPathw
*:Examplesofsignalingpathways(e.g.,hormonesignaling,neurotransmission).**CellCycleandCellDivision**:Phasesofthecellcycle(interphase,mitosis,cytokinesis)andtheirregulation.Importanceofcelldivisioningrowth,repair,andreproduct
CancerandCellRegulation**:Introductiontocancerasuncontrolledcellgrowthanddivision.Causesofcancer(mutations,environmentalfactors),mechanismsoftumorformation,andapproachestocancertreatment.**StemCellsandRegenerative
ine**:Overviewofstemcells,theirproperties(pluripotent,multipotent),andpotentialapplicationsinregenerativemedicineandresearch.**MicroscopyandCellVisualization**:Techniquesandtypesofmicroscopyusedtostudycells,includinglightm
copy,electronmicroscopy,andfluorescencemicroscopy.**SummaryandKeyConcepts**:Thechapterconcludeswithasummaryofkeyconceptsrelatedtocellstructure,function,andorganization,reinforcingunderstandingofcellularbiologyfunda
als.Chapter4providesacomprehensiveexplorationofthestructureandfunctionsofcells,highlightingtheircomplexityandorganizationatthemicroscopiclevel.Itservesasafoundationalchapterinunderstandinghowcellularstructuresandprocesses
butetothefunctioningoforganismsandecosystems.IfyouhavespecificquestionsaboutanyofthesetopicsorwouldlikemoredetailedinformationonaparticularaspectofChapter4
Chapter 3
Financial Statements, Cash Flow, and Taxes
Learning Objectives
After reading this chapter, students should be able to:
List each of the key financial statements and identify the kinds of information they provide to
corporate managers and investors.
Estimate a firm’s free cash flow and explain why free cash flow has such an important effect on firm
value.
Discuss the major features of the federal income tax system.
reinforcingunderstandingofthefoundationalprinciplesofbiochemistryandtheirsignificanceinbiologicalprocesses.Chapter2providesacomprehensiveintroductiontothechemicalfoundationsthatunderpinbiologicalsystems.Itestablishesacrucialunderstanding
chemicalprinciplesgovernthestructure,function,andinteractionsofbiologicalmoleculesessentialforlife.Thisknowledgeservesasabasisforfurtherexplorationintocellularprocesses,genetics,andphysiologicalmechanismscoveredinsubsequentchaptersofthetex
IfyouhavespecificquestionsaboutanyofthesetopicsorwouldlikemoredetailedinformationonaparticularaspectofChapter2,feelfreetoask!
,andtheCellTheory.**CellStructure**:Explorationofthestructureoftypicaleukaryoticcells,including:**CellMembrane**:Structure,composition(lipidbilayer,proteins),functionsincelltransport,signaling,andrecognition.**Cytoplasm**:Composition,orga
suspendedwithin(e.g.,cytoskeleton,ribosomes).**Nucleus**:Structure,functions(DNAstorage,transcription,regulationofcellactivities).**Organelles**:Detailedexaminationoforganellessuchasmitochondria,endoplasmicreticulum,Golgiapparatus,lysoso
ndtheirrolesincellularprocesses.**ProkaryoticCells**:Comparisonofprokaryoticandeukaryoticcellstructures,emphasizingdifferencesinorganelles,geneticmaterial(nonucleusinprokaryotes),andcellularprocesses.**CellularOrganizationandFunction**:In
ionofcellularcomponentsandorganellestosupportcellularfunctionssuchasmetabolism,proteinsynthesis,energyproduction(e.g.,ATPsynthesis),andmaintenanceofhomeostasis.**CellularTransport**:Mechanismsofcellulartransport,including:**PassiveTra
t**:Diffusion,osmosis,facilitateddiffusion.**ActiveTransport**:Ionpumps,carrierproteins,endocytosis,exocytosis.**BulkTransport**:Phagocytosis,pinocytosis.**CellCommunication**:Overviewofcellularcommunicationprocesses,including:**Rece
roteins**:Recognitionofsignalingmolecules(ligands).**SignalTransduction**:Transmissionofsignalswithincells(e.g.,secondmessengers).**CellSignalingPathways**:Examplesofsignalingpathways(e.g.,hormonesignaling,neurotransmission).**CellC
dCellDivision**:Phasesofthecellcycle(interphase,mitosis,cytokinesis)andtheirregulation.Importanceofcelldivisioningrowth,repair,andreproduction.**CancerandCellRegulation**:Introductiontocancerasuncontrolledcellgrowthanddivision.Causesofca
mutations,environmentalfactors),mechanismsoftumorformation,andapproachestocancertreatment.**StemCellsandRegenerativeMedicine**:Overviewofstemcells,theirproperties(pluripotent,multipotent),andpotentialapplicationsinregenerativemedicin
search.**MicroscopyandCellVisualization**:Techniquesandtypesofmicroscopyusedtostudycells,includinglightmicroscopy,electronmicroscopy,andfluorescencemicroscopy.**SummaryandKeyConcepts**:Thechapterconcludeswithasummaryofkeyco
srelatedtocellstructure,function,andorganization,reinforcingunderstandingofcellularbiologyfundamentals.Chapter4providesacomprehensiveexplorationofthestructureandfunctionsofcells,highlightingtheircomplexityandorganizationatthemicroscopiclev
rvesasafoundationalchapterinunderstandinghowcellularstructuresandprocessescontributetothefunctioningoforganismsandecosystems.IfyouhavespecificquestionsaboutanyofthesetopicsorwouldlikemoredetailedinformationonaparticularaspectofChapte
Chapter 3: Financial Statements, Cash Flow, and Taxes Learning Objectives 21
© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a
license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Full download all chapters instantly please go to Solutions Manual, Test Bank site: TestBankLive.com
Lecture Suggestions
The goal of financial management is to take actions that will maximize the value of a firm’s stock. These
© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a
license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
, actions will show up, eventually, in the financial statements, so a general understanding of financial
statements is critically important.
Note that Chapter 3 provides a bridge between accounting, which students have just covered,
and financial management. Unfortunately, many non-accounting students did not learn as much as they
should have in their accounting courses, so we find it necessary to spend more time on financial
statements than we would like. Also, at Florida and many other schools, students vary greatly in their
knowledge of accounting, with accounting majors being well-grounded because they have had more
intense introductory courses and, more importantly, because they are taking advanced financial
accounting concurrently with finance. This gives the accountants a major, and somewhat unfair,
advantage over the others in dealing with Chapters 3 and 4 on exams. We know of no good solution to
this problem, but what we do is pitch the coverage of this material to the non-accountants. If we pitch
the lectures (and exams) to the accountants, they simply blow away and demoralize our non-
accountants, and we do not want that. Perhaps Florida has more of a difference between accounting and
non-accounting students, but at least for us there really is a major difference.
What we cover, and the way we cover it, can be seen by scanning the slides and Integrated Case
solution for Chapter 3, which appears at the end of this chapter’s solutions. For other suggestions about
the lecture, please see the “Lecture Suggestions” in Chapter 2, where we describe how we conduct our
classes.
reinforcingunderstandingofthefoundationalprinciplesofbiochemistryandtheirsignificanceinbiologicalprocesses.Chapter2providesacomprehensiveintroductiontothechemicalfoundationsthatunderpinbiologicalsystems.Itestablishesacrucialunderstanding
chemicalprinciplesgovernthestructure,function,andinteractionsofbiologicalmoleculesessentialforlife.Thisknowledgeservesasabasisforfurtherexplorationintocellularprocesses,genetics,andphysiologicalmechanismscoveredinsubsequentchaptersofthetex
IfyouhavespecificquestionsaboutanyofthesetopicsorwouldlikemoredetailedinformationonaparticularaspectofChapter2,feelfreetoask!
,andtheCellTheory.**CellStructure**:Explorationofthestructureoftypicaleukaryoticcells,including:**CellMembrane**:Structure,composition(lipidbilayer,proteins),functionsincelltransport,signaling,andrecognition.**Cytoplasm**:Composition,orga
suspendedwithin(e.g.,cytoskeleton,ribosomes).**Nucleus**:Structure,functions(DNAstorage,transcription,regulationofcellactivities).**Organelles**:Detailedexaminationoforganellessuchasmitochondria,endoplasmicreticulum,Golgiapparatus,lysoso
ndtheirrolesincellularprocesses.**ProkaryoticCells**:Comparisonofprokaryoticandeukaryoticcellstructures,emphasizingdifferencesinorganelles,geneticmaterial(nonucleusinprokaryotes),andcellularprocesses.**CellularOrganizationandFunction**:In
ionofcellularcomponentsandorganellestosupportcellularfunctionssuchasmetabolism,proteinsynthesis,energyproduction(e.g.,ATPsynthesis),andmaintenanceofhomeostasis.**CellularTransport**:Mechanismsofcellulartransport,including:**PassiveTra
t**:Diffusion,osmosis,facilitateddiffusion.**ActiveTransport**:Ionpumps,carrierproteins,endocytosis,exocytosis.**BulkTransport**:Phagocytosis,pinocytosis.**CellCommunication**:Overviewofcellularcommunicationprocesses,including:**Rece
roteins**:Recognitionofsignalingmolecules(ligands).**SignalTransduction**:Transmissionofsignalswithincells(e.g.,secondmessengers).**CellSignalingPathways**:Examplesofsignalingpathways(e.g.,hormonesignaling,neurotransmission).**CellC
dCellDivision**:Phasesofthecellcycle(interphase,mitosis,cytokinesis)andtheirregulation.Importanceofcelldivisioningrowth,repair,andreproduction.**CancerandCellRegulation**:Introductiontocancerasuncontrolledcellgrowthanddivision.Causesofca
mutations,environmentalfactors),mechanismsoftumorformation,andapproachestocancertreatment.**StemCellsandRegenerativeMedicine**:Overviewofstemcells,theirproperties(pluripotent,multipotent),andpotentialapplicationsinregenerativemedicin
search.**MicroscopyandCellVisualization**:Techniquesandtypesofmicroscopyusedtostudycells,includinglightmicroscopy,electronmicroscopy,andfluorescencemicroscopy.**SummaryandKeyConcepts**:Thechapterconcludeswithasummaryofkeyco
srelatedtocellstructure,function,andorganization,reinforcingunderstandingofcellularbiologyfundamentals.Chapter4providesacomprehensiveexplorationofthestructureandfunctionsofcells,highlightingtheircomplexityandorganizationatthemicroscopiclev
rvesasafoundationalchapterinunderstandinghowcellularstructuresandprocessescontributetothefunctioningoforganismsandecosystems.IfyouhavespecificquestionsaboutanyofthesetopicsorwouldlikemoredetailedinformationonaparticularaspectofChapte
DAYS ON CHAPTER: 2 OF 56 DAYS (50-minute periods)
22 Lecture Suggestions Chapter 3: Financial Statements, Cash Flow, and Taxes
Answers to End-of-Chapter Questions
3-1 The four financial statements contained in most annual reports are the balance sheet, income
statement, statement of stockholders’ equity, and statement of cash flows.
3-2 Bankers and investors use financial statements to make intelligent decisions about what firms to
extend credit or in which to invest, managers need financial statements to operate their
businesses efficiently, and taxing authorities need them to assess taxes in a reasonable way.
3-3 No, because the $20 million of retained earnings would probably not be held as cash. The
retained earnings figure represents the reinvestment of earnings by the firm over its life.
Consequently, the $20 million would be an investment in all of the firm’s assets.
3-4 The balance sheet shows the firm’s financial position on a specific date, for example, December
31, 2012. It shows each account balance at that particular point in time. For example, the cash
account shown on the balance sheet would represent the cash the firm has on hand and in the
bank on December 31, 2012. The income statement, on the other hand, reports on the firm’s
operations over a period of time, for example, over the last 12 months. It reports revenues and
expenses that the firm has incurred over that particular time period. For example, the sales
figures reported on the income statement for the period ending December 31, 2012, would
© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a
license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
, represent the firm’s sales over the period from January 1, 2012, through December 31, 2012, not
just sales for December 31, 2012.
3-5 Investors need to be cautious when they review financial statements. While companies are
required to follow GAAP, managers still have quite a lot of discretion in deciding how and when to
report certain transactions. Consequently, two firms in exactly the same operating situation may
report financial statements that convey different impressions about their financial strength. Some
variations may stem from legitimate differences of opinion about the correct way to record
transactions. In other cases, managers may choose to report numbers in a way that helps them
present either higher earnings or more stable earnings over time. As long as they follow GAAP,
such actions are not illegal, but these differences make it harder for investors to compare
companies and gauge their true performances.
reinforcingunderstandingofthefoundationalprinciplesofbiochemistryandtheirsignificanceinbiologicalprocesses.Chapter2providesacomprehensiveintroductiontothechemicalfoundationsthatunderpi
nbiologicalsystems.Itestablishesacrucialunderstandingofhowchemicalprinciplesgovernthestructure,function,andinteractionsofbiologicalmoleculesessentialforlife.Thisknowledgeservesasabasisforf
urtherexplorationintocellularprocesses,genetics,andphysiologicalmechanismscoveredinsubsequentchaptersofthetextbook.Ifyouhavespecificquestionsaboutanyofthesetopicsorwouldlikemoredetaile
dinformationonaparticularaspectofChapter2,feelfreetoask!
,andtheCellTheory.**CellStructure**:Explorationofthestructureoftypicaleukaryoticcells,including:**CellMembrane**:Structure,composition(lipidbilayer,proteins),functionsincelltransport,signal
ing,andrecognition.**Cytoplasm**:Composition,organellessuspendedwithin(e.g.,cytoskeleton,ribosomes).**Nucleus**:Structure,functions(DNAstorage,transcription,regulationofcellactivities).*
*Organelles**:Detailedexaminationoforganellessuchasmitochondria,endoplasmicreticulum,Golgiapparatus,lysosomes,andtheirrolesincellularprocesses.**ProkaryoticCells**:Comparisonofproka
ryoticandeukaryoticcellstructures,emphasizingdifferencesinorganelles,geneticmaterial(nonucleusinprokaryotes),andcellularprocesses.**CellularOrganizationandFunction**:Integrationofcellularc
omponentsandorganellestosupportcellularfunctionssuchasmetabolism,proteinsynthesis,energyproduction(e.g.,ATPsynthesis),andmaintenanceofhomeostasis.**CellularTransport**:Mechanismsof
cellulartransport,including:**PassiveTransport**:Diffusion,osmosis,facilitateddiffusion.**ActiveTransport**:Ionpumps,carrierproteins,endocytosis,exocytosis.**BulkTransport**:Phagocytosis,
pinocytosis.**CellCommunication**:Overviewofcellularcommunicationprocesses,including:**ReceptorProteins**:Recognitionofsignalingmolecules(ligands).**SignalTransduction**:Transmis
sionofsignalswithincells(e.g.,secondmessengers).**CellSignalingPathways**:Examplesofsignalingpathways(e.g.,hormonesignaling,neurotransmission).**CellCycleandCellDivision**:Phasesoft
hecellcycle(interphase,mitosis,cytokinesis)andtheirregulation.Importanceofcelldivisioningrowth,repair,andreproduction.**CancerandCellRegulation**:Introductiontocancerasuncontrolledcellgro
wthanddivision.Causesofcancer(mutations,environmentalfactors),mechanismsoftumorformation,andapproachestocancertreatment.**StemCellsandRegenerativeMedicine**:Overviewofstemcells,
theirproperties(pluripotent,multipotent),andpotentialapplicationsinregenerativemedicineandresearch.**MicroscopyandCellVisualization**:Techniquesandtypesofmicroscopyusedtostudycells,incl
udinglightmicroscopy,electronmicroscopy,andfluorescencemicroscopy.**SummaryandKeyConcepts**:Thechapterconcludeswithasummaryofkeyconceptsrelatedtocellstructure,function,andorgan
ization,reinforcingunderstandingofcellularbiologyfundamentals.Chapter4providesacomprehensiveexplorationofthestructureandfunctionsofcells,highlightingtheircomplexityandorganizationatthem
icroscopiclevel.Itservesasafoundationalchapterinunderstandinghowcellularstructuresandprocessescontributetothefunctioningoforganismsandecosystems.Ifyouhavespecificquestionsaboutanyofthe
setopicsorwouldlikemoredetailedinformationonaparticularaspectofChapter4
Unfortunately, there have also been cases where managers overstepped the bounds and
reported fraudulent statements. Indeed, a number of high-profile executives have faced criminal
charges because of their misleading accounting practices.
3-6 a. No, the average American household’s financial position has declined over 2004–2009. Over
this period of time, mortgage and installment loan balances increased, total assets decreased
due to the decline in cash in bank accounts and the values of retirement savings and personal
homes, and income has declined slightly.
b. As this text is being written (May 2011) unemployment is still high and the number of
foreclosures and bank-owned properties have flooded the supply of homes so home prices
are still on the decline. Consequently, one would expect the average household’s financial
position not to have improved from the 2009 numbers. In fact, one might even estimate a
further decline. However, there are markets like the Midwest with stronger economies
(agriculture and energy) where the situation has improved, so some experts are anticipating
a more rosy picture in 2012. Only time will tell…
3-7 Free cash flow is the amount of cash that could be withdrawn from the firm without harming its
ability to operate and to produce future cash flows. It is calculated as after-tax operating income
Chapter 3: Financial Statements, Cash Flow, and Taxes Answers and Solutions 23
plus depreciation less capital expenditures and the change in net operating working capital. It is
more important than net income because it shows the exact amount available to all investors
(stockholders and debtholders). The value of a company’s operations depends on expected
future free cash flows. Therefore, managers make their companies more valuable by increasing
their free cash flow. Net income, on the other hand, reflects accounting profit but not cash flow.
Therefore, investors ought to focus on cash flow rather than accounting profit.
3-8 Yes. Negative free cash flow is not necessarily bad. Most rapidly growing companies have
negative free cash flows because the fixed assets and working capital needed to support rapid
growth generally exceed cash flows from existing operations. This is not bad, provided the new
investments will eventually be profitable and they contribute to free cash flow.
© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a
license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
, 3-9 This statement means that the higher one’s income, the larger the percentage paid in taxes.
3-10 Double taxation refers to the fact that corporate income is subject to an income tax, and then
stockholders are subject to a further personal tax on dividends received. In fact, because of
double taxation Congress was motivated to reduce the tax rate on dividends to the same rate
(15%) as long-term capital gains (at least through 2012). However, the tax rate is scheduled to
rise on January 1, 2013.
reinforcingunderstandingofthefoundationalprinciplesofbiochemistryandtheirsignificanceinbiologicalprocesses.Chapter2providesacomprehensiveintroductiontothechemicalfoundationsthatunder
pinbiologicalsystems.Itestablishesacrucialunderstandingofhowchemicalprinciplesgovernthestructure,function,andinteractionsofbiologicalmoleculesessentialforlife.Thisknowledgeservesasabasi
sforfurtherexplorationintocellularprocesses,genetics,andphysiologicalmechanismscoveredinsubsequentchaptersofthetextbook.Ifyouhavespecificquestionsaboutanyofthesetopicsorwouldlikemor
edetailedinformationonaparticularaspectofChapter2,feelfreetoask!
,andtheCellTheory.**CellStructure**:Explorationofthestructureoftypicaleukaryoticcells,including:**CellMembrane**:Structure,composition(lipidbilayer,proteins),functionsincelltransport,sig
naling,andrecognition.**Cytoplasm**:Composition,organellessuspendedwithin(e.g.,cytoskeleton,ribosomes).**Nucleus**:Structure,functions(DNAstorage,transcription,regulationofcellactivi
ties).**Organelles**:Detailedexaminationoforganellessuchasmitochondria,endoplasmicreticulum,Golgiapparatus,lysosomes,andtheirrolesincellularprocesses.**ProkaryoticCells**:Compariso
nofprokaryoticandeukaryoticcellstructures,emphasizingdifferencesinorganelles,geneticmaterial(nonucleusinprokaryotes),andcellularprocesses.**CellularOrganizationandFunction**:Integratio
nofcellularcomponentsandorganellestosupportcellularfunctionssuchasmetabolism,proteinsynthesis,energyproduction(e.g.,ATPsynthesis),andmaintenanceofhomeostasis.**CellularTransport**:
Mechanismsofcellulartransport,including:**PassiveTransport**:Diffusion,osmosis,facilitateddiffusion.**ActiveTransport**:Ionpumps,carrierproteins,endocytosis,exocytosis.**BulkTransport
**:Phagocytosis,pinocytosis.**CellCommunication**:Overviewofcellularcommunicationprocesses,including:**ReceptorProteins**:Recognitionofsignalingmolecules(ligands).**SignalTrans
duction**:Transmissionofsignalswithincells(e.g.,secondmessengers).**CellSignalingPathways**:Examplesofsignalingpathways(e.g.,hormonesignaling,neurotransmission).**CellCycleandCel
lDivision**:Phasesofthecellcycle(interphase,mitosis,cytokinesis)andtheirregulation.Importanceofcelldivisioningrowth,repair,andreproduction.**CancerandCellRegulation**:Introductiontocan
cerasuncontrolledcellgrowthanddivision.Causesofcancer(mutations,environmentalfactors),mechanismsoftumorformation,andapproachestocancertreatment.**StemCellsandRegenerativeMedici
ne**:Overviewofstemcells,theirproperties(pluripotent,multipotent),andpotentialapplicationsinregenerativemedicineandresearch.**MicroscopyandCellVisualization**:Techniquesandtypesofmi
croscopyusedtostudycells,includinglightmicroscopy,electronmicroscopy,andfluorescencemicroscopy.**SummaryandKeyConcepts**:Thechapterconcludeswithasummaryofkeyconceptsrelatedt
ocellstructure,function,andorganization,reinforcingunderstandingofcellularbiologyfundamentals.Chapter4providesacomprehensiveexplorationofthestructureandfunctionsofcells,highlightingthei
rcomplexityandorganizationatthemicroscopiclevel.Itservesasafoundationalchapterinunderstandinghowcellularstructuresandprocessescontributetothefunctioningoforganismsandecosystems.Ifyo
uhavespecificquestionsaboutanyofthesetopicsorwouldlikemoredetailedinformationonaparticularaspectofChapter4
Income could even be subject to triple taxation. Triple taxation occurs when (1) the original
corporation is first taxed, (2) the second corporation is then taxed on the dividends it received,
and (3) the individuals who receive the final dividends are taxed again. Therefore, corporations
that receive dividend income can exclude some of the dividends from its taxable income. This
provision in the Tax Code minimizes the amount of triple taxation that would otherwise occur.
3-11 Because interest paid is tax deductible but dividend payments are not, the after-tax cost of debt
is lower than the after-tax cost of equity. This encourages the use of debt rather than equity.
This point is discussed in detail in Chapters 10 and 14.
reinforcingunderstandingofthefoundationalprinciplesofbiochemistryandtheirsignificanceinbiologicalprocesses.Chapter2providesacomprehensiveintroductiontothechemicalfoundationsthatunderpinbiologicalsystems.Itestablish
ucialunderstandingofhowchemicalprinciplesgovernthestructure,function,andinteractionsofbiologicalmoleculesessentialforlife.Thisknowledgeservesasabasisforfurtherexplorationintocellularprocesses,genetics,andphysiologicalmechanismscoveredinsu
entchaptersofthetextbook.IfyouhavespecificquestionsaboutanyofthesetopicsorwouldlikemoredetailedinformationonaparticularaspectofChapter2,feelfreetoask!
,andtheCellTheory.**CellStructure**:Explorationofthestructureoftypicaleukaryoticcells,including:**CellMembrane**:Structure,composition(lipidbilayer,proteins),functionsincelltransport,signaling,andrecognition.**Cytoplasm**:Composition,orga
suspendedwithin(e.g.,cytoskeleton,ribosomes).**Nucleus**:Structure,functions(DNAstorage,transcription,regulationofcellactivities).**Organelles**:Detailedexaminationoforganellessuchasmitochondria,endoplasmicreticulum,Golgiapparatus,lysoso
ndtheirrolesincellularprocesses.**ProkaryoticCells**:Comparisonofprokaryoticandeukaryoticcellstructures,emphasizingdifferencesinorganelles,geneticmaterial(nonucleusinprokaryotes),andcellularprocesses.**CellularOrganizationandFunction**:In
ionofcellularcomponentsandorganellestosupportcellularfunctionssuchasmetabolism,proteinsynthesis,energyproduction(e.g.,ATPsynthesis),andmaintenanceofhomeostasis.**CellularTransport**:Mechanismsofcellulartransport,including:**PassiveTra
t**:Diffusion,osmosis,facilitateddiffusion.**ActiveTransport**:Ionpumps,carrierproteins,endocytosis,exocytosis.**BulkTransport**:Phagocytosis,pinocytosis.**CellCommunication**:Overviewofcellularcommunicationprocesses,including:**Rece
roteins**:Recognitionofsignalingmolecules(ligands).**SignalTransduction**:Transmissionofsignalswithincells(e.g.,secondmessengers).**CellSignalingPathways**:Examplesofsignalingpathways(e.g.,hormonesignaling,neurotransmission).**CellC
dCellDivision**:Phasesofthecellcycle(interphase,mitosis,cytokinesis)andtheirregulation.Importanceofcelldivisioningrowth,repair,andreproduction.**CancerandCellRegulation**:Introductiontocancerasuncontrolledcellgrowthanddivision.Causesofca
mutations,environmentalfactors),mechanismsoftumorformation,andapproachestocancertreatment.**StemCellsandRegenerativeMedicine**:Overviewofstemcells,theirproperties(pluripotent,multipotent),andpotentialapplicationsinregenerativemedicin
search.**MicroscopyandCellVisualization**:Techniquesandtypesofmicroscopyusedtostudycells,includinglightmicroscopy,electronmicroscopy,andfluorescencemicroscopy.**SummaryandKeyConcepts**:Thechapterconcludeswithasummaryofkeyco
srelatedtocellstructure,function,andorganization,reinforcingunderstandingofcellularbiologyfundamentals.Chapter4providesacomprehensiveexplorationofthestructureandfunctionsofcells,highlightingtheircomplexityandorganizationatthemicroscopiclev
rvesasafoundationalchapterinunderstandinghowcellularstructuresandprocessescontributetothefunctioningoforganismsandecosystems.IfyouhavespecificquestionsaboutanyofthesetopicsorwouldlikemoredetailedinformationonaparticularaspectofChapte
24 Answers and Solutions Chapter 3: Financial Statements, Cash Flow, and Taxes
Solutions to End-of-Chapter Problems
3-1 From the data given in the problem, we know the following:
Current assets $ 500,000b Accounts payable and accruals $ 100,000d
Net plant and equipment 2,000,000 Notes payable 150,000
Current liabilities $ 250,000c
Long-term debt 750,000
Total common equity 1,500,000
Total assets $2,500,000 Total liabilities and equity $2,500,000a
Note: Superscripts correspond to parts below.
a. We are given that the firm’s total assets equal $2,500,000. Since both sides of the balance
© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a
license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
erstandingofhowchemicalprinciplesgovernthestructure,function,andinteractionsofbiologicalmoleculesessentialforlife.Thisknowledgeservesasabasisforfurtherexplorationintocellularprocesses,genetics,andphysiologicalmechanismscovere
bsequentchaptersofthetextbook.IfyouhavespecificquestionsaboutanyofthesetopicsorwouldlikemoredetailedinformationonaparticularaspectofChapter2,feelfreetoask!
,andtheCellTheory.**CellStructure**:Explorationofthestructureoftypicaleukaryoticcells,including:**CellMembrane**:Structure,composition(lipidbilayer,proteins),functionsincelltransport,signaling,andrecognition.**Cytoplasm**:C
sition,organellessuspendedwithin(e.g.,cytoskeleton,ribosomes).**Nucleus**:Structure,functions(DNAstorage,transcription,regulationofcellactivities).**Organelles**:Detailedexaminationoforganellessuchasmitochondria,endoplasmicre
m,Golgiapparatus,lysosomes,andtheirrolesincellularprocesses.**ProkaryoticCells**:Comparisonofprokaryoticandeukaryoticcellstructures,emphasizingdifferencesinorganelles,geneticmaterial(nonucleusinprokaryotes),andcellularproc
**CellularOrganizationandFunction**:Integrationofcellularcomponentsandorganellestosupportcellularfunctionssuchasmetabolism,proteinsynthesis,energyproduction(e.g.,ATPsynthesis),andmaintenanceofhomeostasis.**CellularTran
**:Mechanismsofcellulartransport,including:**PassiveTransport**:Diffusion,osmosis,facilitateddiffusion.**ActiveTransport**:Ionpumps,carrierproteins,endocytosis,exocytosis.**BulkTransport**:Phagocytosis,pinocytosis.**CellCom
ication**:Overviewofcellularcommunicationprocesses,including:**ReceptorProteins**:Recognitionofsignalingmolecules(ligands).**SignalTransduction**:Transmissionofsignalswithincells(e.g.,secondmessengers).**CellSignalingPathw
*:Examplesofsignalingpathways(e.g.,hormonesignaling,neurotransmission).**CellCycleandCellDivision**:Phasesofthecellcycle(interphase,mitosis,cytokinesis)andtheirregulation.Importanceofcelldivisioningrowth,repair,andreproduct
CancerandCellRegulation**:Introductiontocancerasuncontrolledcellgrowthanddivision.Causesofcancer(mutations,environmentalfactors),mechanismsoftumorformation,andapproachestocancertreatment.**StemCellsandRegenerative
ine**:Overviewofstemcells,theirproperties(pluripotent,multipotent),andpotentialapplicationsinregenerativemedicineandresearch.**MicroscopyandCellVisualization**:Techniquesandtypesofmicroscopyusedtostudycells,includinglightm
copy,electronmicroscopy,andfluorescencemicroscopy.**SummaryandKeyConcepts**:Thechapterconcludeswithasummaryofkeyconceptsrelatedtocellstructure,function,andorganization,reinforcingunderstandingofcellularbiologyfunda
als.Chapter4providesacomprehensiveexplorationofthestructureandfunctionsofcells,highlightingtheircomplexityandorganizationatthemicroscopiclevel.Itservesasafoundationalchapterinunderstandinghowcellularstructuresandprocesses
butetothefunctioningoforganismsandecosystems.IfyouhavespecificquestionsaboutanyofthesetopicsorwouldlikemoredetailedinformationonaparticularaspectofChapter4
Chapter 3
Financial Statements, Cash Flow, and Taxes
Learning Objectives
After reading this chapter, students should be able to:
List each of the key financial statements and identify the kinds of information they provide to
corporate managers and investors.
Estimate a firm’s free cash flow and explain why free cash flow has such an important effect on firm
value.
Discuss the major features of the federal income tax system.
reinforcingunderstandingofthefoundationalprinciplesofbiochemistryandtheirsignificanceinbiologicalprocesses.Chapter2providesacomprehensiveintroductiontothechemicalfoundationsthatunderpinbiologicalsystems.Itestablishesacrucialunderstanding
chemicalprinciplesgovernthestructure,function,andinteractionsofbiologicalmoleculesessentialforlife.Thisknowledgeservesasabasisforfurtherexplorationintocellularprocesses,genetics,andphysiologicalmechanismscoveredinsubsequentchaptersofthetex
IfyouhavespecificquestionsaboutanyofthesetopicsorwouldlikemoredetailedinformationonaparticularaspectofChapter2,feelfreetoask!
,andtheCellTheory.**CellStructure**:Explorationofthestructureoftypicaleukaryoticcells,including:**CellMembrane**:Structure,composition(lipidbilayer,proteins),functionsincelltransport,signaling,andrecognition.**Cytoplasm**:Composition,orga
suspendedwithin(e.g.,cytoskeleton,ribosomes).**Nucleus**:Structure,functions(DNAstorage,transcription,regulationofcellactivities).**Organelles**:Detailedexaminationoforganellessuchasmitochondria,endoplasmicreticulum,Golgiapparatus,lysoso
ndtheirrolesincellularprocesses.**ProkaryoticCells**:Comparisonofprokaryoticandeukaryoticcellstructures,emphasizingdifferencesinorganelles,geneticmaterial(nonucleusinprokaryotes),andcellularprocesses.**CellularOrganizationandFunction**:In
ionofcellularcomponentsandorganellestosupportcellularfunctionssuchasmetabolism,proteinsynthesis,energyproduction(e.g.,ATPsynthesis),andmaintenanceofhomeostasis.**CellularTransport**:Mechanismsofcellulartransport,including:**PassiveTra
t**:Diffusion,osmosis,facilitateddiffusion.**ActiveTransport**:Ionpumps,carrierproteins,endocytosis,exocytosis.**BulkTransport**:Phagocytosis,pinocytosis.**CellCommunication**:Overviewofcellularcommunicationprocesses,including:**Rece
roteins**:Recognitionofsignalingmolecules(ligands).**SignalTransduction**:Transmissionofsignalswithincells(e.g.,secondmessengers).**CellSignalingPathways**:Examplesofsignalingpathways(e.g.,hormonesignaling,neurotransmission).**CellC
dCellDivision**:Phasesofthecellcycle(interphase,mitosis,cytokinesis)andtheirregulation.Importanceofcelldivisioningrowth,repair,andreproduction.**CancerandCellRegulation**:Introductiontocancerasuncontrolledcellgrowthanddivision.Causesofca
mutations,environmentalfactors),mechanismsoftumorformation,andapproachestocancertreatment.**StemCellsandRegenerativeMedicine**:Overviewofstemcells,theirproperties(pluripotent,multipotent),andpotentialapplicationsinregenerativemedicin
search.**MicroscopyandCellVisualization**:Techniquesandtypesofmicroscopyusedtostudycells,includinglightmicroscopy,electronmicroscopy,andfluorescencemicroscopy.**SummaryandKeyConcepts**:Thechapterconcludeswithasummaryofkeyco
srelatedtocellstructure,function,andorganization,reinforcingunderstandingofcellularbiologyfundamentals.Chapter4providesacomprehensiveexplorationofthestructureandfunctionsofcells,highlightingtheircomplexityandorganizationatthemicroscopiclev
rvesasafoundationalchapterinunderstandinghowcellularstructuresandprocessescontributetothefunctioningoforganismsandecosystems.IfyouhavespecificquestionsaboutanyofthesetopicsorwouldlikemoredetailedinformationonaparticularaspectofChapte
Chapter 3: Financial Statements, Cash Flow, and Taxes Learning Objectives 21
© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a
license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Full download all chapters instantly please go to Solutions Manual, Test Bank site: TestBankLive.com
Lecture Suggestions
The goal of financial management is to take actions that will maximize the value of a firm’s stock. These
© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a
license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
, actions will show up, eventually, in the financial statements, so a general understanding of financial
statements is critically important.
Note that Chapter 3 provides a bridge between accounting, which students have just covered,
and financial management. Unfortunately, many non-accounting students did not learn as much as they
should have in their accounting courses, so we find it necessary to spend more time on financial
statements than we would like. Also, at Florida and many other schools, students vary greatly in their
knowledge of accounting, with accounting majors being well-grounded because they have had more
intense introductory courses and, more importantly, because they are taking advanced financial
accounting concurrently with finance. This gives the accountants a major, and somewhat unfair,
advantage over the others in dealing with Chapters 3 and 4 on exams. We know of no good solution to
this problem, but what we do is pitch the coverage of this material to the non-accountants. If we pitch
the lectures (and exams) to the accountants, they simply blow away and demoralize our non-
accountants, and we do not want that. Perhaps Florida has more of a difference between accounting and
non-accounting students, but at least for us there really is a major difference.
What we cover, and the way we cover it, can be seen by scanning the slides and Integrated Case
solution for Chapter 3, which appears at the end of this chapter’s solutions. For other suggestions about
the lecture, please see the “Lecture Suggestions” in Chapter 2, where we describe how we conduct our
classes.
reinforcingunderstandingofthefoundationalprinciplesofbiochemistryandtheirsignificanceinbiologicalprocesses.Chapter2providesacomprehensiveintroductiontothechemicalfoundationsthatunderpinbiologicalsystems.Itestablishesacrucialunderstanding
chemicalprinciplesgovernthestructure,function,andinteractionsofbiologicalmoleculesessentialforlife.Thisknowledgeservesasabasisforfurtherexplorationintocellularprocesses,genetics,andphysiologicalmechanismscoveredinsubsequentchaptersofthetex
IfyouhavespecificquestionsaboutanyofthesetopicsorwouldlikemoredetailedinformationonaparticularaspectofChapter2,feelfreetoask!
,andtheCellTheory.**CellStructure**:Explorationofthestructureoftypicaleukaryoticcells,including:**CellMembrane**:Structure,composition(lipidbilayer,proteins),functionsincelltransport,signaling,andrecognition.**Cytoplasm**:Composition,orga
suspendedwithin(e.g.,cytoskeleton,ribosomes).**Nucleus**:Structure,functions(DNAstorage,transcription,regulationofcellactivities).**Organelles**:Detailedexaminationoforganellessuchasmitochondria,endoplasmicreticulum,Golgiapparatus,lysoso
ndtheirrolesincellularprocesses.**ProkaryoticCells**:Comparisonofprokaryoticandeukaryoticcellstructures,emphasizingdifferencesinorganelles,geneticmaterial(nonucleusinprokaryotes),andcellularprocesses.**CellularOrganizationandFunction**:In
ionofcellularcomponentsandorganellestosupportcellularfunctionssuchasmetabolism,proteinsynthesis,energyproduction(e.g.,ATPsynthesis),andmaintenanceofhomeostasis.**CellularTransport**:Mechanismsofcellulartransport,including:**PassiveTra
t**:Diffusion,osmosis,facilitateddiffusion.**ActiveTransport**:Ionpumps,carrierproteins,endocytosis,exocytosis.**BulkTransport**:Phagocytosis,pinocytosis.**CellCommunication**:Overviewofcellularcommunicationprocesses,including:**Rece
roteins**:Recognitionofsignalingmolecules(ligands).**SignalTransduction**:Transmissionofsignalswithincells(e.g.,secondmessengers).**CellSignalingPathways**:Examplesofsignalingpathways(e.g.,hormonesignaling,neurotransmission).**CellC
dCellDivision**:Phasesofthecellcycle(interphase,mitosis,cytokinesis)andtheirregulation.Importanceofcelldivisioningrowth,repair,andreproduction.**CancerandCellRegulation**:Introductiontocancerasuncontrolledcellgrowthanddivision.Causesofca
mutations,environmentalfactors),mechanismsoftumorformation,andapproachestocancertreatment.**StemCellsandRegenerativeMedicine**:Overviewofstemcells,theirproperties(pluripotent,multipotent),andpotentialapplicationsinregenerativemedicin
search.**MicroscopyandCellVisualization**:Techniquesandtypesofmicroscopyusedtostudycells,includinglightmicroscopy,electronmicroscopy,andfluorescencemicroscopy.**SummaryandKeyConcepts**:Thechapterconcludeswithasummaryofkeyco
srelatedtocellstructure,function,andorganization,reinforcingunderstandingofcellularbiologyfundamentals.Chapter4providesacomprehensiveexplorationofthestructureandfunctionsofcells,highlightingtheircomplexityandorganizationatthemicroscopiclev
rvesasafoundationalchapterinunderstandinghowcellularstructuresandprocessescontributetothefunctioningoforganismsandecosystems.IfyouhavespecificquestionsaboutanyofthesetopicsorwouldlikemoredetailedinformationonaparticularaspectofChapte
DAYS ON CHAPTER: 2 OF 56 DAYS (50-minute periods)
22 Lecture Suggestions Chapter 3: Financial Statements, Cash Flow, and Taxes
Answers to End-of-Chapter Questions
3-1 The four financial statements contained in most annual reports are the balance sheet, income
statement, statement of stockholders’ equity, and statement of cash flows.
3-2 Bankers and investors use financial statements to make intelligent decisions about what firms to
extend credit or in which to invest, managers need financial statements to operate their
businesses efficiently, and taxing authorities need them to assess taxes in a reasonable way.
3-3 No, because the $20 million of retained earnings would probably not be held as cash. The
retained earnings figure represents the reinvestment of earnings by the firm over its life.
Consequently, the $20 million would be an investment in all of the firm’s assets.
3-4 The balance sheet shows the firm’s financial position on a specific date, for example, December
31, 2012. It shows each account balance at that particular point in time. For example, the cash
account shown on the balance sheet would represent the cash the firm has on hand and in the
bank on December 31, 2012. The income statement, on the other hand, reports on the firm’s
operations over a period of time, for example, over the last 12 months. It reports revenues and
expenses that the firm has incurred over that particular time period. For example, the sales
figures reported on the income statement for the period ending December 31, 2012, would
© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a
license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
, represent the firm’s sales over the period from January 1, 2012, through December 31, 2012, not
just sales for December 31, 2012.
3-5 Investors need to be cautious when they review financial statements. While companies are
required to follow GAAP, managers still have quite a lot of discretion in deciding how and when to
report certain transactions. Consequently, two firms in exactly the same operating situation may
report financial statements that convey different impressions about their financial strength. Some
variations may stem from legitimate differences of opinion about the correct way to record
transactions. In other cases, managers may choose to report numbers in a way that helps them
present either higher earnings or more stable earnings over time. As long as they follow GAAP,
such actions are not illegal, but these differences make it harder for investors to compare
companies and gauge their true performances.
reinforcingunderstandingofthefoundationalprinciplesofbiochemistryandtheirsignificanceinbiologicalprocesses.Chapter2providesacomprehensiveintroductiontothechemicalfoundationsthatunderpi
nbiologicalsystems.Itestablishesacrucialunderstandingofhowchemicalprinciplesgovernthestructure,function,andinteractionsofbiologicalmoleculesessentialforlife.Thisknowledgeservesasabasisforf
urtherexplorationintocellularprocesses,genetics,andphysiologicalmechanismscoveredinsubsequentchaptersofthetextbook.Ifyouhavespecificquestionsaboutanyofthesetopicsorwouldlikemoredetaile
dinformationonaparticularaspectofChapter2,feelfreetoask!
,andtheCellTheory.**CellStructure**:Explorationofthestructureoftypicaleukaryoticcells,including:**CellMembrane**:Structure,composition(lipidbilayer,proteins),functionsincelltransport,signal
ing,andrecognition.**Cytoplasm**:Composition,organellessuspendedwithin(e.g.,cytoskeleton,ribosomes).**Nucleus**:Structure,functions(DNAstorage,transcription,regulationofcellactivities).*
*Organelles**:Detailedexaminationoforganellessuchasmitochondria,endoplasmicreticulum,Golgiapparatus,lysosomes,andtheirrolesincellularprocesses.**ProkaryoticCells**:Comparisonofproka
ryoticandeukaryoticcellstructures,emphasizingdifferencesinorganelles,geneticmaterial(nonucleusinprokaryotes),andcellularprocesses.**CellularOrganizationandFunction**:Integrationofcellularc
omponentsandorganellestosupportcellularfunctionssuchasmetabolism,proteinsynthesis,energyproduction(e.g.,ATPsynthesis),andmaintenanceofhomeostasis.**CellularTransport**:Mechanismsof
cellulartransport,including:**PassiveTransport**:Diffusion,osmosis,facilitateddiffusion.**ActiveTransport**:Ionpumps,carrierproteins,endocytosis,exocytosis.**BulkTransport**:Phagocytosis,
pinocytosis.**CellCommunication**:Overviewofcellularcommunicationprocesses,including:**ReceptorProteins**:Recognitionofsignalingmolecules(ligands).**SignalTransduction**:Transmis
sionofsignalswithincells(e.g.,secondmessengers).**CellSignalingPathways**:Examplesofsignalingpathways(e.g.,hormonesignaling,neurotransmission).**CellCycleandCellDivision**:Phasesoft
hecellcycle(interphase,mitosis,cytokinesis)andtheirregulation.Importanceofcelldivisioningrowth,repair,andreproduction.**CancerandCellRegulation**:Introductiontocancerasuncontrolledcellgro
wthanddivision.Causesofcancer(mutations,environmentalfactors),mechanismsoftumorformation,andapproachestocancertreatment.**StemCellsandRegenerativeMedicine**:Overviewofstemcells,
theirproperties(pluripotent,multipotent),andpotentialapplicationsinregenerativemedicineandresearch.**MicroscopyandCellVisualization**:Techniquesandtypesofmicroscopyusedtostudycells,incl
udinglightmicroscopy,electronmicroscopy,andfluorescencemicroscopy.**SummaryandKeyConcepts**:Thechapterconcludeswithasummaryofkeyconceptsrelatedtocellstructure,function,andorgan
ization,reinforcingunderstandingofcellularbiologyfundamentals.Chapter4providesacomprehensiveexplorationofthestructureandfunctionsofcells,highlightingtheircomplexityandorganizationatthem
icroscopiclevel.Itservesasafoundationalchapterinunderstandinghowcellularstructuresandprocessescontributetothefunctioningoforganismsandecosystems.Ifyouhavespecificquestionsaboutanyofthe
setopicsorwouldlikemoredetailedinformationonaparticularaspectofChapter4
Unfortunately, there have also been cases where managers overstepped the bounds and
reported fraudulent statements. Indeed, a number of high-profile executives have faced criminal
charges because of their misleading accounting practices.
3-6 a. No, the average American household’s financial position has declined over 2004–2009. Over
this period of time, mortgage and installment loan balances increased, total assets decreased
due to the decline in cash in bank accounts and the values of retirement savings and personal
homes, and income has declined slightly.
b. As this text is being written (May 2011) unemployment is still high and the number of
foreclosures and bank-owned properties have flooded the supply of homes so home prices
are still on the decline. Consequently, one would expect the average household’s financial
position not to have improved from the 2009 numbers. In fact, one might even estimate a
further decline. However, there are markets like the Midwest with stronger economies
(agriculture and energy) where the situation has improved, so some experts are anticipating
a more rosy picture in 2012. Only time will tell…
3-7 Free cash flow is the amount of cash that could be withdrawn from the firm without harming its
ability to operate and to produce future cash flows. It is calculated as after-tax operating income
Chapter 3: Financial Statements, Cash Flow, and Taxes Answers and Solutions 23
plus depreciation less capital expenditures and the change in net operating working capital. It is
more important than net income because it shows the exact amount available to all investors
(stockholders and debtholders). The value of a company’s operations depends on expected
future free cash flows. Therefore, managers make their companies more valuable by increasing
their free cash flow. Net income, on the other hand, reflects accounting profit but not cash flow.
Therefore, investors ought to focus on cash flow rather than accounting profit.
3-8 Yes. Negative free cash flow is not necessarily bad. Most rapidly growing companies have
negative free cash flows because the fixed assets and working capital needed to support rapid
growth generally exceed cash flows from existing operations. This is not bad, provided the new
investments will eventually be profitable and they contribute to free cash flow.
© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a
license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
, 3-9 This statement means that the higher one’s income, the larger the percentage paid in taxes.
3-10 Double taxation refers to the fact that corporate income is subject to an income tax, and then
stockholders are subject to a further personal tax on dividends received. In fact, because of
double taxation Congress was motivated to reduce the tax rate on dividends to the same rate
(15%) as long-term capital gains (at least through 2012). However, the tax rate is scheduled to
rise on January 1, 2013.
reinforcingunderstandingofthefoundationalprinciplesofbiochemistryandtheirsignificanceinbiologicalprocesses.Chapter2providesacomprehensiveintroductiontothechemicalfoundationsthatunder
pinbiologicalsystems.Itestablishesacrucialunderstandingofhowchemicalprinciplesgovernthestructure,function,andinteractionsofbiologicalmoleculesessentialforlife.Thisknowledgeservesasabasi
sforfurtherexplorationintocellularprocesses,genetics,andphysiologicalmechanismscoveredinsubsequentchaptersofthetextbook.Ifyouhavespecificquestionsaboutanyofthesetopicsorwouldlikemor
edetailedinformationonaparticularaspectofChapter2,feelfreetoask!
,andtheCellTheory.**CellStructure**:Explorationofthestructureoftypicaleukaryoticcells,including:**CellMembrane**:Structure,composition(lipidbilayer,proteins),functionsincelltransport,sig
naling,andrecognition.**Cytoplasm**:Composition,organellessuspendedwithin(e.g.,cytoskeleton,ribosomes).**Nucleus**:Structure,functions(DNAstorage,transcription,regulationofcellactivi
ties).**Organelles**:Detailedexaminationoforganellessuchasmitochondria,endoplasmicreticulum,Golgiapparatus,lysosomes,andtheirrolesincellularprocesses.**ProkaryoticCells**:Compariso
nofprokaryoticandeukaryoticcellstructures,emphasizingdifferencesinorganelles,geneticmaterial(nonucleusinprokaryotes),andcellularprocesses.**CellularOrganizationandFunction**:Integratio
nofcellularcomponentsandorganellestosupportcellularfunctionssuchasmetabolism,proteinsynthesis,energyproduction(e.g.,ATPsynthesis),andmaintenanceofhomeostasis.**CellularTransport**:
Mechanismsofcellulartransport,including:**PassiveTransport**:Diffusion,osmosis,facilitateddiffusion.**ActiveTransport**:Ionpumps,carrierproteins,endocytosis,exocytosis.**BulkTransport
**:Phagocytosis,pinocytosis.**CellCommunication**:Overviewofcellularcommunicationprocesses,including:**ReceptorProteins**:Recognitionofsignalingmolecules(ligands).**SignalTrans
duction**:Transmissionofsignalswithincells(e.g.,secondmessengers).**CellSignalingPathways**:Examplesofsignalingpathways(e.g.,hormonesignaling,neurotransmission).**CellCycleandCel
lDivision**:Phasesofthecellcycle(interphase,mitosis,cytokinesis)andtheirregulation.Importanceofcelldivisioningrowth,repair,andreproduction.**CancerandCellRegulation**:Introductiontocan
cerasuncontrolledcellgrowthanddivision.Causesofcancer(mutations,environmentalfactors),mechanismsoftumorformation,andapproachestocancertreatment.**StemCellsandRegenerativeMedici
ne**:Overviewofstemcells,theirproperties(pluripotent,multipotent),andpotentialapplicationsinregenerativemedicineandresearch.**MicroscopyandCellVisualization**:Techniquesandtypesofmi
croscopyusedtostudycells,includinglightmicroscopy,electronmicroscopy,andfluorescencemicroscopy.**SummaryandKeyConcepts**:Thechapterconcludeswithasummaryofkeyconceptsrelatedt
ocellstructure,function,andorganization,reinforcingunderstandingofcellularbiologyfundamentals.Chapter4providesacomprehensiveexplorationofthestructureandfunctionsofcells,highlightingthei
rcomplexityandorganizationatthemicroscopiclevel.Itservesasafoundationalchapterinunderstandinghowcellularstructuresandprocessescontributetothefunctioningoforganismsandecosystems.Ifyo
uhavespecificquestionsaboutanyofthesetopicsorwouldlikemoredetailedinformationonaparticularaspectofChapter4
Income could even be subject to triple taxation. Triple taxation occurs when (1) the original
corporation is first taxed, (2) the second corporation is then taxed on the dividends it received,
and (3) the individuals who receive the final dividends are taxed again. Therefore, corporations
that receive dividend income can exclude some of the dividends from its taxable income. This
provision in the Tax Code minimizes the amount of triple taxation that would otherwise occur.
3-11 Because interest paid is tax deductible but dividend payments are not, the after-tax cost of debt
is lower than the after-tax cost of equity. This encourages the use of debt rather than equity.
This point is discussed in detail in Chapters 10 and 14.
reinforcingunderstandingofthefoundationalprinciplesofbiochemistryandtheirsignificanceinbiologicalprocesses.Chapter2providesacomprehensiveintroductiontothechemicalfoundationsthatunderpinbiologicalsystems.Itestablish
ucialunderstandingofhowchemicalprinciplesgovernthestructure,function,andinteractionsofbiologicalmoleculesessentialforlife.Thisknowledgeservesasabasisforfurtherexplorationintocellularprocesses,genetics,andphysiologicalmechanismscoveredinsu
entchaptersofthetextbook.IfyouhavespecificquestionsaboutanyofthesetopicsorwouldlikemoredetailedinformationonaparticularaspectofChapter2,feelfreetoask!
,andtheCellTheory.**CellStructure**:Explorationofthestructureoftypicaleukaryoticcells,including:**CellMembrane**:Structure,composition(lipidbilayer,proteins),functionsincelltransport,signaling,andrecognition.**Cytoplasm**:Composition,orga
suspendedwithin(e.g.,cytoskeleton,ribosomes).**Nucleus**:Structure,functions(DNAstorage,transcription,regulationofcellactivities).**Organelles**:Detailedexaminationoforganellessuchasmitochondria,endoplasmicreticulum,Golgiapparatus,lysoso
ndtheirrolesincellularprocesses.**ProkaryoticCells**:Comparisonofprokaryoticandeukaryoticcellstructures,emphasizingdifferencesinorganelles,geneticmaterial(nonucleusinprokaryotes),andcellularprocesses.**CellularOrganizationandFunction**:In
ionofcellularcomponentsandorganellestosupportcellularfunctionssuchasmetabolism,proteinsynthesis,energyproduction(e.g.,ATPsynthesis),andmaintenanceofhomeostasis.**CellularTransport**:Mechanismsofcellulartransport,including:**PassiveTra
t**:Diffusion,osmosis,facilitateddiffusion.**ActiveTransport**:Ionpumps,carrierproteins,endocytosis,exocytosis.**BulkTransport**:Phagocytosis,pinocytosis.**CellCommunication**:Overviewofcellularcommunicationprocesses,including:**Rece
roteins**:Recognitionofsignalingmolecules(ligands).**SignalTransduction**:Transmissionofsignalswithincells(e.g.,secondmessengers).**CellSignalingPathways**:Examplesofsignalingpathways(e.g.,hormonesignaling,neurotransmission).**CellC
dCellDivision**:Phasesofthecellcycle(interphase,mitosis,cytokinesis)andtheirregulation.Importanceofcelldivisioningrowth,repair,andreproduction.**CancerandCellRegulation**:Introductiontocancerasuncontrolledcellgrowthanddivision.Causesofca
mutations,environmentalfactors),mechanismsoftumorformation,andapproachestocancertreatment.**StemCellsandRegenerativeMedicine**:Overviewofstemcells,theirproperties(pluripotent,multipotent),andpotentialapplicationsinregenerativemedicin
search.**MicroscopyandCellVisualization**:Techniquesandtypesofmicroscopyusedtostudycells,includinglightmicroscopy,electronmicroscopy,andfluorescencemicroscopy.**SummaryandKeyConcepts**:Thechapterconcludeswithasummaryofkeyco
srelatedtocellstructure,function,andorganization,reinforcingunderstandingofcellularbiologyfundamentals.Chapter4providesacomprehensiveexplorationofthestructureandfunctionsofcells,highlightingtheircomplexityandorganizationatthemicroscopiclev
rvesasafoundationalchapterinunderstandinghowcellularstructuresandprocessescontributetothefunctioningoforganismsandecosystems.IfyouhavespecificquestionsaboutanyofthesetopicsorwouldlikemoredetailedinformationonaparticularaspectofChapte
24 Answers and Solutions Chapter 3: Financial Statements, Cash Flow, and Taxes
Solutions to End-of-Chapter Problems
3-1 From the data given in the problem, we know the following:
Current assets $ 500,000b Accounts payable and accruals $ 100,000d
Net plant and equipment 2,000,000 Notes payable 150,000
Current liabilities $ 250,000c
Long-term debt 750,000
Total common equity 1,500,000
Total assets $2,500,000 Total liabilities and equity $2,500,000a
Note: Superscripts correspond to parts below.
a. We are given that the firm’s total assets equal $2,500,000. Since both sides of the balance
© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a
license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
