Solution Manual For
Finance: Applications and Theory
Authors: Marcia Cornett
6th Edition
© McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.
,Table of Contents
Part One: Introduction
Chapter 1: Introduction to Financial Management
Part Two: Financial Statements
Chapter 2: Reviewing Financial Statements
Chapter 3: Analyzing Financial Statements
Part Three: Valuing of Future Cash Flows
Chapter 4: Time Value of Money 1: Analyzing Single Cash Flows
Chapter 5: Time Value of Money 2: Analyzing Annuity Cash Flows
Part Four: Valuing of Bonds and Stocks
Chapter 6: Understanding Financial Markets and Institutions
Chapter 7: Valuing Bonds
Chapter 8: Valuing Stocks
Part Five: Risk and Return
Chapter 9: Characterizing Risk and Return
Chapter 10: Estimating Risk and Return
Part Six: Capital Budgeting
Chapter 11: Calculating the Cost of Capital
Chapter 12: Estimating Cash Flows on Capital Budgeting Projects
Chapter 13: Weighing Net Present Value and Other Capital Budgeting
Part Seven: Working Capital Management and Financial Planning
Chapter 14: Working Capital Management and Policies
Chapter 15: Financial Planning and Forecasting
Part Eight: Capital Structure Issues
Chapter 16: Assessing Long-Term Debt, Equity, and Capital Structure
Chapter 17: Sharing Firm Wealth: Dividends, Share Repurchases, and Other Payouts
Chapter 18: Issuing Capital and the Investment Banking Process
Part Nine: Other Topics in Finance
Chapter 19: International Corporate Finance
Chapter 20: Mergers and Acquisitions and Financial Distress
© McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.
, SOLUTION MANUAL FOR
Finance Applications And Theory 6e Cornett
Chapter 2-20
CHAPTER 2 – REVIEWING FINANCIAL STATEMENTS
Questions
LG2-1 1. List And Describe The Four Major Financial Statements.
The Four Basic Financial Statements Are:
1. The Balance Sheet Reports A Firm’s Assets, Liabilities, And Equity At A Particular Point In Time.
2. The Income Statement Shows The Total Revenues That A Firm Earns And The Total
Expenses The Firm Incurs To Generate Those Revenues Over A Specific Period Of
Time—Generally One Year.
3. The Statement Of Cash Flows Shows The Firm’s Cash Flows Over A Given Period Of Time.
This Statement Reports The Amounts Of Cash The Firm Generated And Distributed
During A Particular Time Period. The Bottom Line On The Statement Of Cash Flows―The
Difference Between Cash Sources And Uses―Equals The Change In Cash And Marketable
Securities On The Firm’s Balance Sheet From The Previous Year’s Balance.
4. The Statement Of Retained Earnings Provides Additional Details About Changes In
Retained Earnings During A Reporting Period. This Financial Statement Reconciles
Net Income Earned During A Given Period Minus Any Cash Dividends Paid Within
That Period To The Change In Retained Earnings Between The Beginning And Ending
Of The Period.
LG2-1 2. On Which Of The Four Major Financial Statements (Balance Sheet, Income Statement,
Statement Of Cash Flows, Or Statement Of Retained Earnings) Would You Find The
Following Items?
a. Earnings Before Taxes - Income Statement
b. Net Plant And Equipment - Balance Sheet
c. Increase In Fixed Assets - Statement Of Cash Flows
d. Gross Profits - Income Statement
e. Balance Of Retained Earnings, December 31, 20xx - Statement Of Retained Earnings And
Balance Sheet
f. Common Stock And Paid-In Surplus - Balance Sheet
g. Net Cash Flow From Investing Activities - Statement Of Cash Flows
h. Accrued Wages And Taxes – Balance Sheet
i. Increase In Inventory - Statement Of Cash Flows
LG2-1 3. What Is The Difference Between Current Liabilities And Long-Term Debt?
© McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.
, Current Liabilities Constitute The Firm’s Obligations Due Within One Year, Including Accrued
Wages And Taxes, Accounts Payable, And Notes Payable. Long-Term Debt Includes Long-Term
Loans And Bonds With Maturities Of More Than One Year.
LG2-1 4. How Does The Choice Of Accounting Method Used To Record Fixed Asset
Depreciation Affect Management Of The Balance Sheet?
Firm Managers Can Choose The Accounting Method They Use To Record Depreciation
Against Their Fixed Assets. Two Choices Include The Straight-Line Method And The Modified
Accelerated Cost Recovery System (MACRS). Companies Often Calculate Depreciation Using
MACRS When They Figure The Firm’s Taxes And The Straight-Line Method When Reporting
Income To The Firm’s Stockholders. The MACRS Method Accelerates Deprecation, Which
Results In Higher Depreciation Expenses, Lower Taxable Income, And Lower Taxes In The
Early Years Of A Project’s Life. The Straight-Line Method Results In Lower Depreciation
Expenses, But Also Results In Higher Taxes In The Early Years Of A Project’s Life. Firms
Seeking To Lower Their Cash Outflows From Tax Payments Will Favor The MACRS
Depreciation Method.
LG2-1 5. What Is Bonus Depreciation? How Did The Tax Cuts And Jobs Act Of 2017 Temporarily
Extend And Modify Bonus Depreciation?
Since 2001, Businesses Have Had The Ability To Immediately Deduct A Percentage Of The
Acquisition Cost Of Qualifying Assets As "Bonus Depreciation." This Additional Depreciation
Deduction Was Allowed To Encourage Business Investment. However, Bonus Depreciation
Was A Temporary Provision; The Rate Would Have Been 50 Percent In 2017, 40 Percent In
2018, And 30 Percent In 2019, Before Phasing Out In 2020. The Tax Cuts And Jobs Act Of
2017 Extended And Modified Bonus Depreciation, Allowing Businesses To Immediately
Deduct 100 Percent Of The Cost Of Eligible Property In The Year It Is Placed In Service,
Through 2022. The Amount Of Allowable Bonus Depreciation Will Then Be Phased Down
Over Four Years: 80 Percent Will Be Allowed For Property Placed In Service In 2023, 60
Percent In 2024, 40 Percent In 2025, And 20 Percent In 2026.
MACRS Or Straight-Line Depreciation Is Applied To Any Costs That Do Not Qualify For Bonus
Depreciation.
LG2-1 6. What Are The Costs And Benefits Of Holding Liquid Securities On A Firm’s Balance Sheet?
The More Liquid Assets A Firm Holds, The Less Likely The Firm Will Be To Experience
Financial Distress. However, Liquid Assets Generate Little Or No Profits For A Firm. For
Example, Cash Is The Most Liquid Of All Assets, But It Earns Little, If Any, Return For The
Firm. In Contrast, Fixed Assets Are Illiquid, But Provide The Means To Generate Revenue.
Thus, Managers Must Consider The Trade-Off Between The Advantages Of Liquidity On The
Balance Sheet And The Disadvantages Of Having Money Sit Idle Rather Than Generating
Profits.
© McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.
Finance: Applications and Theory
Authors: Marcia Cornett
6th Edition
© McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.
,Table of Contents
Part One: Introduction
Chapter 1: Introduction to Financial Management
Part Two: Financial Statements
Chapter 2: Reviewing Financial Statements
Chapter 3: Analyzing Financial Statements
Part Three: Valuing of Future Cash Flows
Chapter 4: Time Value of Money 1: Analyzing Single Cash Flows
Chapter 5: Time Value of Money 2: Analyzing Annuity Cash Flows
Part Four: Valuing of Bonds and Stocks
Chapter 6: Understanding Financial Markets and Institutions
Chapter 7: Valuing Bonds
Chapter 8: Valuing Stocks
Part Five: Risk and Return
Chapter 9: Characterizing Risk and Return
Chapter 10: Estimating Risk and Return
Part Six: Capital Budgeting
Chapter 11: Calculating the Cost of Capital
Chapter 12: Estimating Cash Flows on Capital Budgeting Projects
Chapter 13: Weighing Net Present Value and Other Capital Budgeting
Part Seven: Working Capital Management and Financial Planning
Chapter 14: Working Capital Management and Policies
Chapter 15: Financial Planning and Forecasting
Part Eight: Capital Structure Issues
Chapter 16: Assessing Long-Term Debt, Equity, and Capital Structure
Chapter 17: Sharing Firm Wealth: Dividends, Share Repurchases, and Other Payouts
Chapter 18: Issuing Capital and the Investment Banking Process
Part Nine: Other Topics in Finance
Chapter 19: International Corporate Finance
Chapter 20: Mergers and Acquisitions and Financial Distress
© McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.
, SOLUTION MANUAL FOR
Finance Applications And Theory 6e Cornett
Chapter 2-20
CHAPTER 2 – REVIEWING FINANCIAL STATEMENTS
Questions
LG2-1 1. List And Describe The Four Major Financial Statements.
The Four Basic Financial Statements Are:
1. The Balance Sheet Reports A Firm’s Assets, Liabilities, And Equity At A Particular Point In Time.
2. The Income Statement Shows The Total Revenues That A Firm Earns And The Total
Expenses The Firm Incurs To Generate Those Revenues Over A Specific Period Of
Time—Generally One Year.
3. The Statement Of Cash Flows Shows The Firm’s Cash Flows Over A Given Period Of Time.
This Statement Reports The Amounts Of Cash The Firm Generated And Distributed
During A Particular Time Period. The Bottom Line On The Statement Of Cash Flows―The
Difference Between Cash Sources And Uses―Equals The Change In Cash And Marketable
Securities On The Firm’s Balance Sheet From The Previous Year’s Balance.
4. The Statement Of Retained Earnings Provides Additional Details About Changes In
Retained Earnings During A Reporting Period. This Financial Statement Reconciles
Net Income Earned During A Given Period Minus Any Cash Dividends Paid Within
That Period To The Change In Retained Earnings Between The Beginning And Ending
Of The Period.
LG2-1 2. On Which Of The Four Major Financial Statements (Balance Sheet, Income Statement,
Statement Of Cash Flows, Or Statement Of Retained Earnings) Would You Find The
Following Items?
a. Earnings Before Taxes - Income Statement
b. Net Plant And Equipment - Balance Sheet
c. Increase In Fixed Assets - Statement Of Cash Flows
d. Gross Profits - Income Statement
e. Balance Of Retained Earnings, December 31, 20xx - Statement Of Retained Earnings And
Balance Sheet
f. Common Stock And Paid-In Surplus - Balance Sheet
g. Net Cash Flow From Investing Activities - Statement Of Cash Flows
h. Accrued Wages And Taxes – Balance Sheet
i. Increase In Inventory - Statement Of Cash Flows
LG2-1 3. What Is The Difference Between Current Liabilities And Long-Term Debt?
© McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.
, Current Liabilities Constitute The Firm’s Obligations Due Within One Year, Including Accrued
Wages And Taxes, Accounts Payable, And Notes Payable. Long-Term Debt Includes Long-Term
Loans And Bonds With Maturities Of More Than One Year.
LG2-1 4. How Does The Choice Of Accounting Method Used To Record Fixed Asset
Depreciation Affect Management Of The Balance Sheet?
Firm Managers Can Choose The Accounting Method They Use To Record Depreciation
Against Their Fixed Assets. Two Choices Include The Straight-Line Method And The Modified
Accelerated Cost Recovery System (MACRS). Companies Often Calculate Depreciation Using
MACRS When They Figure The Firm’s Taxes And The Straight-Line Method When Reporting
Income To The Firm’s Stockholders. The MACRS Method Accelerates Deprecation, Which
Results In Higher Depreciation Expenses, Lower Taxable Income, And Lower Taxes In The
Early Years Of A Project’s Life. The Straight-Line Method Results In Lower Depreciation
Expenses, But Also Results In Higher Taxes In The Early Years Of A Project’s Life. Firms
Seeking To Lower Their Cash Outflows From Tax Payments Will Favor The MACRS
Depreciation Method.
LG2-1 5. What Is Bonus Depreciation? How Did The Tax Cuts And Jobs Act Of 2017 Temporarily
Extend And Modify Bonus Depreciation?
Since 2001, Businesses Have Had The Ability To Immediately Deduct A Percentage Of The
Acquisition Cost Of Qualifying Assets As "Bonus Depreciation." This Additional Depreciation
Deduction Was Allowed To Encourage Business Investment. However, Bonus Depreciation
Was A Temporary Provision; The Rate Would Have Been 50 Percent In 2017, 40 Percent In
2018, And 30 Percent In 2019, Before Phasing Out In 2020. The Tax Cuts And Jobs Act Of
2017 Extended And Modified Bonus Depreciation, Allowing Businesses To Immediately
Deduct 100 Percent Of The Cost Of Eligible Property In The Year It Is Placed In Service,
Through 2022. The Amount Of Allowable Bonus Depreciation Will Then Be Phased Down
Over Four Years: 80 Percent Will Be Allowed For Property Placed In Service In 2023, 60
Percent In 2024, 40 Percent In 2025, And 20 Percent In 2026.
MACRS Or Straight-Line Depreciation Is Applied To Any Costs That Do Not Qualify For Bonus
Depreciation.
LG2-1 6. What Are The Costs And Benefits Of Holding Liquid Securities On A Firm’s Balance Sheet?
The More Liquid Assets A Firm Holds, The Less Likely The Firm Will Be To Experience
Financial Distress. However, Liquid Assets Generate Little Or No Profits For A Firm. For
Example, Cash Is The Most Liquid Of All Assets, But It Earns Little, If Any, Return For The
Firm. In Contrast, Fixed Assets Are Illiquid, But Provide The Means To Generate Revenue.
Thus, Managers Must Consider The Trade-Off Between The Advantages Of Liquidity On The
Balance Sheet And The Disadvantages Of Having Money Sit Idle Rather Than Generating
Profits.
© McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.
