Fundamentals of Financial Management (Concise 6th Edition)

76 Part 2 Fundamental Concepts in Financial Management

The primary purposes of this chapter were to describe the basic! nancial statements,

to present background information on cash " ows, to di$ erentiate between cash " ow

and accounting income, and to provide an overview of the federal income tax sys-

tem. In the next chapter, we build on this information to analyze a! rm’s! nancial

statements and to determine its! nancial health.

KEY TERMS Define each of the following terms:

a. Annual report; balance sheet; income statement; statement of cash flows; statement of

stockholders’ equity

b. Stockholders’ equity; retained earnings; working capital; net working capital

c. Depreciation; amortization; operating income; EBITDA; free cash flow

d. Progressive tax; marginal tax rate; average tax rate

e. Tax loss carry-back; carry-forward; AMT

f. Capital gain (loss)

g. S corporation

NET INCOME AND CASH FLOW Last year Rattner Robotics had $5 million in operating

income (EBIT). Its depreciation expense was $1 million, its interest expense was $1 million,

and its corporate tax rate was 40%. At year-end, it had $14 million in current assets,

$3 million in accounts payable, $1 million in accruals, and $15 million in net plant and

equipment. Assume that Rattner’s only noncash item was depreciation.

a. What was the company’s net income?

b. What was its net working capital (NWC)?

c. Rattner had $12 million in net plant and equipment the prior year. Its net working

capital has remained constant over time. What is the company’s free cash flow (FCF)

for the year that just ended?

d. If the firm had $4.5 million in retained earnings at the beginning of the year and paid

out total dividends of $1.2 million, what was its retained earnings at the end of the

year? Assume that all dividends declared were actually paid.

What four financial statements are contained in most annual reports?

Who are some of the basic users of financial statements, and how do they use them?

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.

Explain the following statement: While the balance sheet can be thought of as a snapshot

of a firm’s financial position at a point in time, the income statement reports on operations

over a period of time.

SELF!TEST QUESTIONS AND PROBLEMS

"Solutions Appear in Appendix A

SELF!TEST QUESTIONS AND PROBLEMS

"Solutions Appear in Appendix A

ST-1ST-1

ST-2ST-2

QUESTIONSQUESTIONS

3-13-1

3-23-2

3-33-3

3-43-4

T Y I N G I T A L L T O G E T H E R