Principle of Finance

The Role and Environment of Finance

   2.Accrual income versus cash flow for a period Thomas Book sales,Inc,Supplies textbooks to collage and university bookstores.The books are shipped with a proviso that they must be paid for and billed titles totaling TK.7,60,000 Collections, net of return credits , during the year totaled TK.690,000 . The company spent TK.300,000 acquiring the books that it shipped.
a.Using accrual accounting and the preceding values, show the firm's net profit for the past year.
b.Using cash accounting and the preceding values,show the firm's net cash flow for the past year.
c.Which of these statements is more useful to the financial manager ? why?

Solution
a.Net profit                     =Sales-cost of goods sold
                                        =760,000-300,000
                                        =TK.460,000
b.Net Cash flow             =Cash receipts-Cost of goods sold
                                       =6,90,000-3,00,000
                                       =3,90,000
c.The cash flow statement is more useful to financial manager The accounting net income includes amounts that will not be collected and as a results,do not contribute to the wealth of the owners. 


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3.Liability comparisons Merideth Harper has invested TK.25,000 in Southwest Development Company. The firm has recently declared bankruptcy and has TK.60,000 in unpaid debts. Explain the nature of payments, if any, by Ms.Harper in each of the following situations.
a.Southwest Development Company is a sole proprietorship owned by Ms.Harper.
b.Southwest Development Company is a  50-50 partnership of Ms.Harper and Christopher Black.
c.Southwest Development Company is a corporation.
Solution
a.Ms.Harper has unlimited liability.
b.Ms.Harper has unlimited liability.
c.Ms.Harper has limited liability, which guarantees that see cannot lose more than she invested.