3-1 Solutions to Chapter 3 Accounting and Finance 1. Sophie's ...

Chapter 03 - Accounting and FinanceTotal taxes = $8,625 + $7,500 = $16,125Total taxes are reduced by $18,125 $16,125 = $2,000.Est time: 06–1014. a. Book value equals the $200,000 the founder of the firm has contributed in tangibleassets. Market value equals the value of his patent plus the value of the productionplant: $50,000,000 + $200,000 = $50,200,000.b. Price per share = $50.2 million/2 million shares = $25.10Book value per share = $200,000/2 million shares = $0.10Est time: 01–0515.Sales $10,000Cost of goods sold 6,500General & administrative expenses 1,000Depreciation expense 1,000EBIT 1,500Interest expense 500Taxable income 1,000Taxes (35%) 350Net income $ 650Cash flow from operations = net income + depreciation expense = $1,650Est time: 06–1016. Cash flow from operations can be positive even if net income is negative. For example,if depreciation expenses are large, then negative net income might correspond to positivecash flow because depreciation is treated as an expense in calculating net income butdoes not represent a cash outflow.Conversely, if net income is positive, but a large portion of sales are made on credit, cashflow can be negative since the sales are revenue but do not yet generate cash. Look backto Table 3.4 and you will see that increases in accounts receivable reduce cash providedby operations.Est time: 01–053-5