Santa Barbara National Comprehensive High School (SHS) Santa Barbara National Comprehensive High School (SHS)

1. Is the net income of a year the money the company made that 1. Is the net income of a year the money the company made that particular
particular year is it a number whose significance is quite doubtful? year is it a number whose significance is quite doubtful?
2. Is depreciation the loss of value of fixed assets? 2. Is depreciation the loss of value of fixed assets?
3. The so called cash flow (net income plus depreciation) is a flow of 3. The so called cash flow (net income plus depreciation) is a flow of cash
cash but is it a flow to the shareholders or to the company? but is it a flow to the shareholders or to the company?
4. The dividend is the part of the net income that the company 4. The dividend is the part of the net income that the company distributes
distributes to shareholders. As the dividend represents real money, the to shareholders. As the dividend represents real money, the net income
net income is also a real money. Is that true? is also a real money. Is that true?
5. The part of the net income that is not distributed to shareholders goes 5. The part of the net income that is not distributed to shareholders goes
to reserves (shareholders equity). As dividends represent real money, to reserves (shareholders equity). As dividends represent real money,
reserves are also real money. Is that true? reserves are also real money. Is that true?
6. Does the shareholders equity represent the savings a company has 6. Does the shareholders equity represent the savings a company has
accumulated through the years? accumulated through the years?
7. Is book value the best proxy to the value of the shares? 7. Is book value the best proxy to the value of the shares?
8. Is a valuation realized by a prestigious investment bank a scientifically 8. Is a valuation realized by a prestigious investment bank a scientifically
approved result which any investor could use as a reference? approved result which any investor could use as a reference?
9. Is it possible for a company with a positive net income and which does 9. Is it possible for a company with a positive net income and which does
not distribute dividends to find itself in suspension of payments? not distribute dividends to find itself in suspension of payments?
10. There are four ways a company can use the money it generates; a) 10. There are four ways a company can use the money it generates; a)
buying the other companies or assets; b) reducing its debt; c) buying the other companies or assets; b) reducing its debt; c) distribute
distribute it to shareholders, and d) increasing to cash holdings. What it to shareholders, and d) increasing to cash holdings. What other
other reasonable things can it do? reasonable things can it do?
11. Assuming a company wishes to distribute money to its shareholders, is 11. Assuming a company wishes to distribute money to its shareholders, is it
it better to distribute dividends or to repurchase shares? better to distribute dividends or to repurchase shares?
12. What is NOPAT? 12. What is NOPAT?
13. WHAT IS EBITDA? 13. WHAT IS EBITDA?
14. Tell me your thoughts about this situation. 14. Tell me your thoughts about this situation.
Astrid and Fred take home roughly the same salary and split all household Astrid and Fred take home roughly the same salary and split all household
expenses down the middle. Each pays half from a separate checking account, expenses down the middle. Each pays half from a separate checking account,
and they also have separate savings and investment accounts. When we lived and they also have separate savings and investment accounts. When we lived
together before we got married, everything was separate and that was together before we got married, everything was separate and that was
acceptable, and now we need to revisit the matter, says Astrid. She is acceptable, and now we need to revisit the matter, says Astrid. She is
working on persuading Fred to open some joint accounts to pay for household working on persuading Fred to open some joint accounts to pay for household
expenses and handle their investments, to make transactions easier and make expenses and handle their investments, to make transactions easier and make
them feel more like a unit. Having all of our finances completely separate has them feel more like a unit. Having all of our finances completely separate has
become a source of contention. become a source of contention.
15. Tell me your thoughts about this situation 15. Tell me your thoughts about this situation
For their eight years of marriage, Shaun is been the households primary For their eight years of marriage, Shaun is been the households primary
money manager and, as the higher earner, has paid for the larger money manager and, as the higher earner, has paid for the larger
expenses. He dutifully tracks those bills as well as their spending in a expenses. He dutifully tracks those bills as well as their spending in a
spreadsheetand often pushes Melissa to be frugal. If I want to spend my spreadsheetand often pushes Melissa to be frugal. If I want to spend my
money on something he thinks is frivolous, he encourages me to be more money on something he thinks is frivolous, he encourages me to be more
careful, and we have a discussion about whether I really need to buy that careful, and we have a discussion about whether I really need to buy that
item, says Melissa. To limit such discussions and prevent arguments about item, says Melissa. To limit such discussions and prevent arguments about
her purchases, Melissa has set herself a max spending limit of $200 per item her purchases, Melissa has set herself a max spending limit of $200 per item
and pays for extraneous items with money from her own separate account. and pays for extraneous items with money from her own separate account.
16. Tell me your thoughts about this situation. 16. Tell me your thoughts about this situation.
About a year ago Richs position was reduced from full- to part-time, and his About a year ago Richs position was reduced from full- to part-time, and his
salary was cut commensurately. The shift has actually worked well in terms of salary was cut commensurately. The shift has actually worked well in terms of
the couples child-care needsthey have two daughters, 4 months and 3 the couples child-care needsthey have two daughters, 4 months and 3
years oldbut Rich worried that Claudia would be unhappy reining in their years oldbut Rich worried that Claudia would be unhappy reining in their
comfortable lifestyle. I dont need a lot of extras, but I was worried that comfortable lifestyle. I dont need a lot of extras, but I was worried that
cutting back on things like eating out and Music Together classes for our cutting back on things like eating out and Music Together classes for our
older daughter might mean more to her, Rich says. When he and Claudia older daughter might mean more to her, Rich says. When he and Claudia
drafted a new budget, Rich realized the lifestyle changes didnt bother her as drafted a new budget, Rich realized the lifestyle changes didnt bother her as
much as he thought they would. Shes been really great about our situation, much as he thought they would. Shes been really great about our situation,
he says, and hasnt pressured me to go out and earn more. he says, and hasnt pressured me to go out and earn more.
17. Tell me your thoughts about this situation 17. Tell me your thoughts about this situation
We disagree sometimes about where were spending money, says Nick, We disagree sometimes about where were spending money, says Nick,
who wants to use extra funds on home improvements, while Erica would who wants to use extra funds on home improvements, while Erica would
prefer to use some discretionary income on fun. She thinks it may be more prefer to use some discretionary income on fun. She thinks it may be more
worthwhile to spend money on a date night, says Nick. I appreciate what worthwhile to spend money on a date night, says Nick. I appreciate what
that does for our relationship, but it doesnt keep the roof from leaking. The that does for our relationship, but it doesnt keep the roof from leaking. The
pair are in the process of deciding how to optimize their saving so they can pair are in the process of deciding how to optimize their saving so they can
satisfy both desires, instead of making the goals an either-or proposition. satisfy both desires, instead of making the goals an either-or proposition.
17 20. 17 20.
2004 2005 2004 2005
Sales $8,036 $8,624 Sales $8,036 $8,624
Depreciation 1,154 1,156 Depreciation 1,154 1,156
Cost of goods sold 2,764 3,138 Cost of goods sold 2,764 3,138
Other expenses 656 548 Other expenses 656 548
Interest 538 618 Interest 538 618
Cash 4,214 4,310 Cash 4,214 4,310
Accounts receivable 5,578 6,284 Accounts receivable 5,578 6,284
Short-tern notes payable 814 764 Short-tern notes payable 814 764
Long-term debt 14,112 15,206 Long-term debt 14,112 15,206
Net fixed assets 35,338 36,182 Net fixed assets 35,338 36,182
Accounts payable 4,426 4,292 Accounts payable 4,426 4,292
Inventory 9,918 10,192 Inventory 9,918 10,192
Dividends 980 1,078 Dividends 980 1,078

a) Create and Income Statement and a Balance Sheet for each year. [Hint: c) Create and Income Statement and a Balance Sheet for each year. [Hint:
Youll need to add accounts to balance the balance sheet.}] Youll need to add accounts to balance the balance sheet.}]
b) For 2005 calculate the cash flow from assets, the cash flow to creditors, d) For 2005 calculate the cash flow from assets, the cash flow to creditors,
and the cash flow to stockholders. and the cash flow to stockholders.