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Date Posted: 13:49:15 01/31/00 Mon
Author: Charles Hodges
Subject: Here is the solution to Hodges' Quiz 1, both classes.

Solution to Quiz 1

1. (45)Write out the Income Statement and Balance Sheet in the correct format and fill in the missing numbers. It is probably easier to copy/paste to create the correct format, then fill

Income Statement
For the Period January 1, 1999 to December 31, 1999

Sales 74.0
Cost of Goods Sold __45.5____
Gross Profit 28.5
Selling and Administrative Expenses 13
Labor Expense 6.0
Depreciation 2.5
EBIT __7.0___
Interest Expense .5
Earnings before Taxes _6.5___
Income Taxes _3.0___
Net Income 3.5

Balance Sheet
As of December 31, 1999

Cash and Marketable Securities __3___
Inventory 9.5
Accounts Receivable 3.6
Prepaid Rent 1.0
Total Current Assets 17.1
Net Plant and Equipment _6.5____
Total Assets __23.6_____

Accounts Payable ___3.4____
Other Short Term Liabilities 3.0
Current Portion of Long Term Debt 1.7
Total Current Liabilites __8.1___
Long Term Debt 3.5
Paid In Capital 4.0
Common Stock (.01 par) 1.0
Retained Earnings 7.0
Total Liabilites and Stockholder’s Equity 23.6


2. (20)On page 570 of your text book (Brigham, Gapenski, and Ehrhardt) is the 12/31/98 Balance Sheet and Income Statement for VanAuken Lumber. On page 572, is the 12/31/98 Balance Sheet and Income Statement for Stevens Textile. Assume that these statements apply to the same company. Further assume that the Stevens Textile Statements are dated 12/31/99. Based on these assumptions our Company’s beginning cash balance was $1,800 and our ending cash balance was $1,080. Given this information, write out the “Operations Portion” of an indirect Statement of Cash Flows.

Operating Activities
Net Income +1800
Depreciation (not listed) 0
Decrease in Account Receivable +4320
Decrease in Inventories +3600
Decrease in Accounts Payables –2880
Increase in Accurals +360
Net Cash flow provided by Operating Activities = $7,200



3. (15)What is the difference between stock price maximization and profit maximization? Which is the better goal for managers?

Objective of management is to maximise shareholders wealth, therefore max stock price is better goal. Investors are concerned with their after-tax wealth. An increase is stock price is money shareholders can spend, profits are not cash and cannot buy things.

Also, Profit maximization flows from from (1) the timing of profits and (2) the riskiness of different operating plans. How-ever, both of these factors are reflected in stock price maximiza-tion. Thus, profit maximization would not necessar-ily lead to stock price maximization.


4. (10)Two key limitations of the proprietorship form of business involve potential difficulty in raising needed capital and the presence of unlimited personal liability for business debts.
a. True

5.(10) As long as sales revenues exceed all costs over part of an accounting period, a firm will avoid any cash shortage.
b. False (cash usually does not equal profits)

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