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Chapter 1 to 2

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Recommended exercises and solutions for chapter 1 and chapter 2
Chapter 1
E1.3 Buy or Sell? Value = $850 + $675 = $1,525 million Value per share = $1,525/25 = $61 Market price = $45 Therefore, BUY!
Chapter 2
E2.1. Applying Accounting Relations: Balance Sheet, Income Statement and Equity Statement

a. Liabilities = Assets – Shareholder’s equity = $400 - $250 = $150 million

b. Net Income = Revenues – Expenses $30 = ? - $175 ? = $205 million

c. Ending equity = Beginning equity + Comprehensive Income – Net Payout $250 = $230 + ? - $12 ? = $32 million

As net income (in the income statement) is $30 million, $2 million was reported as “other comprehensive income” in the equity statement.

d. Net payout = Dividends + Share repurchases – Share issues As there were no share issues or repurchases, dividend = $12.

E2.2. Applying Accounting Relations: Cash Flow Statement

Change in cash = CFO – Cash investment – Cash paid out in financing activities $130 = $400 - ? - $75 ? = $195 million

E2.4. Preparing an Income Statement and Statement of Shareholders’ Equity
Income statement: Sales $4,458 Cost of good sold 3,348 Gross margin 1,110 Selling expenses (1,230) Research and development (450) Operating income (570) Income taxes 200 Net loss (370)

Note that research and developments expenses are expensed as incurred.

Equity statement:

Beginning equity, 2012 $3,270

Net loss $(370) Other comprehensive income 76 (294) ($76 is unrealized gain on…...

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