Chapter 3 Financial Statements, Cash Flow, and Taxes a. The annual report is a report issued annually by a corporation to its stockholders. It contains basic financial statements, as well as management’s opinion of the past year’s operations and the firm’s future prospects. | Chapter 3 Financial Statements Cash Flow and Taxes ANSWERS TO END-OF-CHAPTER QUESTIONS 3-1 a. The annual report is a report issued annually by a corporation to its stockholders. It contains basic financial statements as well as management s opinion of the past year s operations and the firm s future prospects. A firm s balance sheet is a statement of the firm s financial position at a specific point in time. It specifically lists the firm s assets on the left-hand side of the balance sheet while the right-hand side shows its liabilities and equity or the claims against these assets. An income statement is a statement summarizing the firm s revenues and expenses over an accounting period. Net sales are shown at the top of each statement after which various costs including income taxes are subtracted to obtain the net income available to common stockholders. The bottom of the statement reports earnings and dividends per share. b. Common Stockholders Equity Net Worth is the capital supplied by common stockholders--capital stock paid-in capital retained earnings and occasionally certain reserves. Paid-in capital is the difference between the stock s par value and what stockholders paid when they bought newly issued shares. Retained earnings is the portion of the firm s earnings that have been saved rather than paid out as dividends. c. The statement of retained earnings shows how much of the firm s earnings were retained in the business rather than paid out in dividends. Note that retained earnings represents a claim against assets not assets per se. Firms retain earnings primarily to expand the business not to accumulate cash in a bank account. The statement of cash flows reports the impact of a firm s operating investing and financing activities on cash flows over an accounting period. d. Depreciation is a non-cash charge against tangible assets such as buildings or machines. It is taken for the purpose of showing an asset s estimated dollar cost of the capital .
