Question

S corporations are small businesses that have the limited-liability benefits of the m of organization yet are taxed as partnerships or proprietorships . In the United States, tax rates are progressive the higher one's income, the larger the percentage paid in taxes asset is sold for a loss, it is called a capital loss. Assets held for more than a year provide lo " Assets such as stocks, bonds, and real estate are defined as capital assets. If a capit for more than its cost, the profit is called a capital gain; if the asset is sold ng-term gains or losses . Dividends are taxed as though they were capital gains. . Personal taxes are discussed in more detail in Web Extension 2A. QUESTIONS (2-1) Define each of the following terms: a. Annual report; balance sheet; income statement b. Common stockholders' equity, or net worth; retained earnings c. Statement of stockholders' equity; statement of cash flows d. Depreciation; amortization; EBITDA e. Operating current assets operating current liabilities; net operating working capital; total net operating capital f. Accounting profit; net cash flow; NOPAT; free cash flow; return on invested capital g. Market Value Added; Economic Value Added h. Progressive tax; taxable income; marginal and average tax rates i Capital gain or loss; tax loss carryback and carryforward j. Improper accumulation; S corporation 2-2) What four statements are contained in most annual reports? 2-3) If a "typical" firm reports $20 million of retained earnings on its balance sheet, can the (2-4) Explain the following statement: "Whereas the balance sheet can be thought of as a firm definitely pay a $20 million cash dividend? snapshot of the firm's financial position at a point in time, the income statement reports on operations over a period of time. (2-5) What is operating capital, and why is it important 12-6 Explain the difference between NOPAT and net incoine Which is a better measure of the (2-7) What is free cash flow? Why is it the most important measure of cash flow? (2-8) If you were starting a business, what tax considerations might cause you to prefer to set it performance of a company's operations? up as a proprietorship or a partnership rather than as a corporation? SELF-TEST PROBLEM Solution Shownin Appendix A (ST-1) Net Income, Cash Last year Cole Furnaces had $5 million in operating income (EBIT). The company had a net depreciation expense of $1 million and an interest expense of S1 million; its corporate Flow, tax rate was 40%. The company has S14 million in operating current assets and $4 million in operating current liabilities; it has $15 million in net plant and equipment. It estimates

Answer 1

2-1(a) Annual Report - The annual report contains the management commentary on the business and the future expected potential for business growth along with the financial performance in the last financial year with income statement, balance sheet and cash flow statement

Balance Sheet - Contains the total assets on one side and lists the total liabilities and total equity on the other side such that assets = liability + equity

Income Statement: Consists of the Net sales (top line) and end with the net income. It helps in calculation of profitability of business

(b) Common stock holder’s equity consists of the book value of the shares that are outstanding along with the paid-up capital for the business

The retained earnings show how much of the net income was retained by the business for future growth opportunities after paying out the dividends if any.

(c)

Cash flow Statement: This statement gives the net cash flows to the company and is divided into three parts namely, cash flow from operating activities, cash flow from financing activities and cash flow from investing activities.

Statement of Retained Earnings: This species how much of the net income was retained by the business for future growth opportunities and what is paid out as dividends. It divides the equity portion in Common Stock, treasury stock and retained earnings.

(d) Amortization and Depreciation: The most common term applicable is depreciation which refers to the natural process of wear and tear of the fixed assets of the business. Depreciation is an accounting methodology and does not involve actual cash flows

EBITDA: Earnings before interest tax depreciation and amortization. Its is also referred to as gross profit which is obtained by reducing the sales by the cost of goods sold.

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