Solution Manual For Finance: Applications and Theory, 5th Edition

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Chapter 2-ReviewingFinancial StatementsCHAPTER 2–REVIEWING FINANCIAL STATEMENTSquestionsLG2-11.List and describe the four major financial statements.The four basic financial statements are:1. Thebalance sheetreports a firm’s assets, liabilities, and equity at a particular point in time.2. Theincome statementshows the total revenues that a firm earns and the total expenses thefirm incurs to generate those revenues over a specific period of time—generally one year.3. Thestatement of cash flowsshows the firm’s cash flows over a given period of time. Thisstatement reports the amounts of cash the firm generated and distributed during a particular timeperiod. The bottom line on the statement of cash flows―the difference between cash sources anduses―equals the change in cashand marketable securitieson the firm’s balance sheet from theprevious year’s balance.4. Thestatement of retained earningsprovides additional details about changes in retainedearnings during a reporting period. This financial statement reconciles net income earned duringa given periodminusany cash dividends paid within that periodto thechange in retainedearnings between the beginning and ending of the period.LG2-12.On which of the four major financial statements (balance sheet, income statement, statement ofcash flows, or statement of retained earnings) would you find the following items?a. earnings before taxes-income statementb. net plant and equipment-balance sheetc. increase in fixed assets-statement of cash flowsd. gross profits-income statemente. balance of retained earnings, December 31, 20xx-statement of retained earningsand balance sheetf. common stock and paid-in surplus-balance sheetg. net cash flow from investing activities-statement of cash flowsh. accrued wages and taxes–balance sheeti. increase in inventory-statement of cash flowsLG2-13.What is the difference between current liabilities and long-term debt?Current liabilities constitute the firm’s obligations due within one year, including accrued wages andtaxes, accounts payable, and notes payable. Long-term debt includes long-term loans and bonds withmaturities of more than one year.LG2-14.How does the choice of accounting method used to record fixed asset depreciation affectmanagement of the balance sheet?Firm managers can choose the accounting method they use to record depreciation against theirfixed assets. Two choices include the straight-line method and the modified accelerated costrecovery system (MACRS). Companies often calculate depreciation using MACRS when theyfigure the firm’s taxes and the straight-line method when reporting income to the firm’s

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