Stock and Income Statement

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Nina Hyde
Dr. Novack
Corporate Finance
Practice Exam

1. The difference between earnings and cash flow is the firm’s earnings are the bottom line of their income statement and is a measure of the firm’s income over a given period of time. The cash flow of a firm shows how a firm has used the cash it earned during a set of time. There are two reasons that the income statement does not show the amount of cash earned. One, there are non-cash entries on the income statement and second, there are certain uses such as a purchase of a building that are not reported on the income statement. The statement of cash flows utilizes the information from the income statement and balance sheet to determine how much cash the firm has generated and how that cash has been allocated during a set period. 2. Shareholder wealth maximization is better objective than maximizing earnings for one, the total profits are not as important as earnings per share. A firm can always raise total profits by issuing stick and using the proceeds to invest. As well as maximizing earnings per share is not a better objective because it does not specify the timing or duration of expected returns. Also, maximizing earnings per share will not consider the risk or uncertainty of the prospective earnings. Some projects can be far risky than others and as a result the earnings per share would be more uncertain if these projects were undertaken. Maximizing shareholder wealth takes into account the present and prospective future earnings per share, the timing, duration, and risk of these earnings, also with any other factors that come about the market price of stock. The market price serves as a performance index or report care of the firm’s progress and indicates how well management is doing in behalf of its stockholders. 3. Debit gives stockholders the options to form a legal contract, fix maturity dates, fix periodic payments, security in case of defaults, deductible interest expense, and no...
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