Chapter 1 Homework:
Q1-3 (pg. 23)
Advantages of Proprietorships and Partnerships: 1. Easy to form 2. Few regulations 3. No corporate income taxes 4. Being one’s own boss

Disadvantages: 1. Limited life 2. Unlimited liability 3. Hard to raise capital

Advantages of Corporations: 1. Unlimited life 2. Easy to transfer ownership 3. Limited liability
4. Easier to raise capital

Disadvantages: 1. Double taxation 2. Costly set up 3. Costly period reports required

Q1-4 (pg. 23)
Profit maximization and maximizing shareholder wealth could conflict. For example, a company could accept very high return (and also very high risk projects) that do not return enough to compensate for the high risk. Profits, or net income, are accounting numbers and therefore subject to manipulation. It would be possible to show positive profits when shareholder wealth was actually being decreased.

Chapter 2 Homework:

P2-2a-c (pg. 57)

a. Operating cash flow = EBIT – Taxes + Depreciation = $4,500 – $1,300 + $1,600 = $4,800

b. Free cash flow = OCF – D FA – (DCA – DA/P – DAccruals) = 4,800 – (31,500 – 30,100) – [(16,200 – 14,800) – (3,600 – 3,500) – (1,200 – 1,300)] = $2,000

c. Operating cash flow (OCF) is higher than free cash flow (FCF) because operating cash flow does not account for investments made during the year. Free cash flow not only looks at operations but also considers whether the company has added assets or reduced liabilities uses of cash) or reduced assets and increased liabilities (sources of cash).

P2-10a-b (pg. 61)

a. Access Corporation – Ratio Analysis Actual 2012
Current ratio 1.04
Quick ratio 0.38
Inventory turnover 2.33
Average collection period 57 days
Average payment period 76 days
Debt-to-equity ratio 39.5%
Times interest earned 2.8
Gross