finance 340 exam study guide Essay

2721 Words Feb 1st, 2014 11 Pages
Midterm Practice Problems
Chapter One: CR 1.2, 1.6, 1.13
2. Disadvantages: unlimited liability, limited life, difficulty in transferring ownership, hard to raise capital funds. Some advantages: simpler, less regulation, the owners are also the managers, sometimes personal tax rates are better than corporate tax rates.

6. In the corporate form of ownership, the shareholders are the owners of the firm. The shareholders elect the directors of the corporation, who in turn appoint the firm’s management. This separation of ownership from control in the corporate form of organization is what causes agency problems to exist. Management may act in its own or someone else’s best interests, rather than those of the shareholders. If such events
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a. To calculate owners’ equity, we first need total liabilities and owners’ equity. From the balance sheet relationship we know that this is equal to total assets. We are given the necessary information to calculate total assets. Total assets are current assets plus fixed assets, so:

Total assets = Current assets + Fixed assets = Total liabilities and owners’ equity

For 2013, we get:

Total assets = $3,198 + 14,826 Total assets = $18,024

Now, we can solve for owners’ equity as:

Total liabilities and owners’ equity = Current liabilities + Long-term debt + Owners’ equity $18,024 = $1,381 + 8,086 + Owners’ equity Owners’ equity = $8,557

For 2014, we get:

Total assets = $3,389 + 15,500 Total assets = $18,889

Now we can solve for owners’ equity as:

Total liabilities and owners’ equity = Current liabilities + Long-term debt + Owners’ equity $18,889 = $2,030 + 9,434 + Owners’ equity Owners’ equity = $7,425

b. The change in net working capital was:

Change in NWC = NWCend – NWCbeg Change in NWC = (CAend – CLend) – (CAbeg – CLbeg) Change in NWC = ($3,389 – 2,030) – ($3,198 – 1,381) Change in NWC = –$458

c. To find the amount of fixed assets the company sold, we need to find the net capital spending. The net capital spending

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