Problem 3-7
Balance Sheet
Which of the following actions are most likely to directly increase cash as shown on a firm's balance sheet? Explain and state the assumptions that underlie your answer.
a. It issues $2 million of new common stock
b. It buys new plant and equipment at a cost of $3 million
c. It reports a large loss for the year
d. It increases the dividends paid on its common stock

The answer is (a.). Issuing $2 million of new common stock would increase the cash because stock is sold and the firm gets paid cash and therefore increasing the cash balance. (b.) would decrease cash because the firm spent cash on new equipment. (c.) just reports a loss which wouldn’t change anything. (d.) would decrease cash because the firm would pay out cash to stockholders.

Problem 3-11
Statement of Cash Flows
You have just been hired as a financial analyst for Basel Industries. Unfortunately, company headquarters (where all of the firm’s records are kept) has been destroyed by fire. So, your first job will be to recreate the firm’s cash flow statement for the year just ended. The firm had $100,000 in the bank at the end of the prior year and its working capital accounts except cash remained constant during the year. It earned $5 million in net income during the year but paid $750,000 in dividends to common shareholders. Throughout the year, the firm purchased $5.5 million of machinery that was needed for a new project. You have just spoken to the firm’s accountants and annual depreciation expense for the year is $450,000; however, the new purchase price for the machinery represents additions to property, plant, and equipment before depreciation. Finally, you have determined that the only financing done by the firm was to issue long-term debt of $1 million at a 6% interest rate. What was the firm’s end –of-year cash balance? Recreate the firm’s cash flow statement to arrive at your answer.
Statement of Cash Flows

I. Operating Activities

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