Table 3.1 H. J. Boswell, Inc.

Corporate TaxesA firm’s income tax liability is based on its taxable income and the tax rates on corporate income.

The Balance SheetThe balance sheet provides a snapshot of the firm’s financial position on a specific date. It is defined by the following equation:

Total Assets = Total Liabilities + Shareholders Equity

Shareholders Equity = Total Assets – Total Liabilites

Table 3.2 H. J. Boswell, Inc.

The Cash Flow StatementThe Cash Flow Statement is used by firms to explain changes in their cash balances over a period of time by identifying all of the sources and uses of cash for the period spanned by the statement.

Cash Flow Analysis SummarySources of Cash Uses of Cash

Decrease in an asset account

Increase in an asset account

Increase in a liability account

Decrease in a liability account

Increase in an owner’s equity account

Decrease in an owners’ equity account

Table 3-3 H. J. Boswell, Inc., Balance Sheets and Balance Sheet Changes

Table 3-4 H. J. Boswell, Inc.

9Table 3.4 Corrected

Statement of Cash Flows for the year ending December 31, 2013

Ending Cash Balance for 2012 $94.50

Operating Activities

Net IncomeIncrease in Accounts ReceivableIncrease in InventoryDepreciation ExpenseIncrease in Accounts Payable

Cash Flow From Operating Activities

$204.75(22.50)

(148.50)145.00

4.50173.25

Investing Activities

Purchases of Plant and EquipmentCash From Investing Activities

(175.50)175.50

Financing Activities

Decrease in short-term notesIncrease in long-term debtCash dividend paid to shareholders

Cash Flow from Financing Activities

(9.00)51.75

(45.00)(2.25)

Increase (decrease) in cash (4.50)

Ending Cash Balance 90.00

Quality of Earnings: Evaluating Cash Flow from OperationsSince reported earnings can sometimes be misleading, we can combine information from the firm’s income statement and the statement of cash flows to evaluate the quality of firm’s reported earnings.

Sustainable Capital Expenditures: Evaluating Investment ActivitiesThis ratio calculates the extent to which the firm’s operating cash flows can pay for capital expenditures. Higher ratio will mean less dependence on capital markets for financing.