1. Financial Statements, Cash Flow, and Taxes: Financial Statements

The focus on financial statements in finance is how managers and investors interpret and use them. A firms annual report contains both verbal and quantitative information. The quantitative information consists of four financial statements: (1) Balance Sheet, (2) Income Statement, (3) Statement of Cash Flows, and (4) Statement of Stockholders' Equity.

The balance sheet shows the firm's assets and claims against those assets. In other words, assets are equal to liabilities and equity. Assets are shown in order of their -Select-balancesliquidityimportanceCorrect 1 of Item 1 and claims are listed in the order of when they must be paid. Current assets include cash and their equivalents, accounts -Select-payablereceivableaccrualCorrect 2 of Item 1, and inventory, while long-term assets are those whose useful lives exceed one year. Liabilities are divided into -Select-current assetsnotes payablecurrent liabilitiesCorrect 3 of Item 1 and long-term debt. We differentiate between total debt and total liabilities. A company's total debt includes both its short-term and long-term -Select-noninterest-bearinginterest-bearingCorrect 4 of Item 1 liabilities. Total liabilities equal -Select-current liabilitiestotal debttotal equityCorrect 5 of Item 1 plus the company's "free" liabilities. -Select-Net working capitalNet fixed assetsNet current liabilitiesCorrect 6 of Item 1 is the difference between current assets and current liabilities, while -Select-net operating current liabilitiesnet operating working capitalnet non-operating current liabilitiesCorrect 7 of Item 1 is equal to operating current assets (calculated as current assets minus excess cash) less the difference between current liabilities and notes payable. -Select-Net incomeOperating incomeNet worthCorrect 8 of Item 1 is capital supplied by common stockholders and represents ownership.

The income statement reports on operations over a period of time. Companies' operating performances can be compared by looking at each firm's EBIT, often referred to as -Select-operating incomenet incometotal incomeCorrect 9 of Item 1. A typical stockholder focuses on the bottom line of the income statement, -Select-dividends per share (DPS)earnings per share (EPS)price per shareCorrect 10 of Item 1. The income statement is tied to the -Select-cashflow statementcash budgetbalance sheetCorrect 11 of Item 1 through the retained earnings account. Net income minus -Select-depreciationinterestdividendsCorrect 12 of Item 1 paid is equal to the retained earnings for the year, and this amount is added to the cumulative retained earnings from prior years to obtain the year-end retained earnings balance.

Management's goal is to maximize the firm's intrinsic value. The value of any asset, including a share of stock, is based on the -Select-net incomecash flowsoperating incomeCorrect 13 of Item 1 the asset is expected to produce. Therefore, managers strive to maximize the -Select-operating incomenet incomecash flowsCorrect 14 of Item 1 available to investors. The statement of cash flows shows how much -Select-incomecashdebtCorrect 15 of Item 1 a firm is generating. It is divided into four parts: (1) Operating activities, (2) Investing activities, (3) Financing activities, and (4) Summary.

Changes in stockholders' equity during an accounting period are reported in the statement of stockholders' equity. Changes in stockholders' equity can come from new stock issues, stock repurchases, net income, and -Select-dividendsinterestdepreciationCorrect 16 of Item 1 paid.

Quantitative Problem: Rosnan Industries' 2019 and 2018 balance sheets and income statements are shown below.

Balance Sheets
	2019	2018
Assets
Cash and equivalents	$120	$105
Accounts receivable	275	300
Inventories	375	250
Total current assets	$770	$655
Net plant and equipment	2,300	1,490
Total assets	$3,070	$2,145
Liabilities and Equity
Accounts payable	$150	$85
Accruals	75	50
Notes payable	170	95
Total current liabilities	$395	$230
Long-term debt	450	290
Common stock	1,225	1,225
Retained earnings	1,000	400
Total liabilities and equity	$3,070	$2,145

Income Statements
	2019	2018
Sales	$2,285	$1,585
Operating costs excluding depreciation	1,250	1,000
EBITDA	$1,035	$585
Depreciation and amortization	100	75
EBIT	$935	$510
Interest	63	46
EBT	$872	$464
Taxes (25%)	218	116
Net income	$654	$348
Dividends paid	$54	$48
Addition to retained earnings	$600	$300
Shares outstanding	100	100
Price	$25.00	$22.50
WACC	10.00%

The balance in the firm's cash and equivalents account is needed for operations and is not considered "excess" cash.

What is Rosnan's 2019 net operating working capital (NOWC)?

$

What is Rosnan's 2019 net working capital (NWC)?

$