Solutions Manual for Essentials of Managerial
Finance 14th Edition by Besley Brigham
CHAPTER 2/SOLUTIONS MANUAL
QUESTIONS
2-1 The four financial
... [Show More] statements contained in most annual reports are the balance sheet, income
statement, statement of retained earnings, and statement of cash flows.
2-2 No, because the $20 million of retained earnings probably would not be held as cash. The
retained earnings figure represents the reinvestment of earnings by the firm. Consequently, the
$20 million would be an investment in all of the assets of the firm.
2-3 Liquidating assets, borrowing more funds, and issuing stock would constitute sources of funds.
Purchasing assets, paying off debt, and stock repurchases would constitute uses of funds. Thus,
the following general rules can be used to determine what changes in balance sheet accounts
represent sources and uses if funds:
Sources of cash:
↑ in a liability or equity account
↓ in an asset account
Uses of Cash:
↓ in a liability of equity
account ↑ in an asset account
2-4 The emphasis of the various types of analysts is by no means uniform, nor should it be. Management
is interested in all types of ratios for two reasons. First, the ratios point out weaknesses that should be
strengthened; second, management recognizes that the other parties are interested in all the ratios and
that financial appearances must be kept up if the firm is to be regarded highly by creditors and equity
investors. Equity investors are interested primarily in profitability, but they examine the other ratios to
get information on the riskiness of equity commitments. Long-term creditors are more interested in
the debt ratio, TIE, and fixed charge coverage ratios, as well as the profitability ratios. Short-term
creditors emphasize liquidity and look most carefully at the liquidity ratios.
2-5 The most important aspect of ratio analysis is the judgment used when interpreting the results to reach
an overall conclusion concerning a firm’s financial position. The analyst should be aware of, and
include in the interpretation, the fact that: (1) large firms with many different divisions are difficult to
categorize in a single industry; (2) financial statements are reported at historical costs; (3) seasonal
factors can distort the ratios; (4) some firms try to ―window dress‖ their financial statements to look
good; (5) firms use different accounting procedures to compute inventory values, depreciation, and so
on; (6) there might not exist a single value that can be used for comparing firms’ ratios (e.g., a current
ratio of 2.0 might not be good); and (7) conclusions concerning the overall financial position of a firm
should a representative number of ratios, not a single ratio. [Show Less]