Book Values versus Market Values
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2.3 Book Values versus Market Values In preparing a balance sheet. why do you think standard accounting practice focuses on historical cost rather than market value? 2.4 Operating Cash Flow In comparing accounting net income and operating cash flow, what two items do you find in net income that are not in operating cash flow? Explain what each is and why it is excluded in operating cash flow. 2.5 Book Values versus Market Values Under standard accounting rules, it is possible for a company’s liabilities to exceed its assets. When this occurs, the owners’ equity is negative. Can this happen with market values? Why or why not? 2.6 Cash Flow from Assets Suppose a company’s cash flow from assets was negative for a particular period. Is this necessarily a good sign or a bad sign? 2.7 Operating Cash Flow Suppose a company’s operating cash flow was negative for several years running. Is this necessarily a good sign or a bad sign? 2.8 Net Working Capital and Capital Spending Could a company’s change in NWC be negative in a given year? (Hint: Yes.) Explain how this might come about. What about net capital spending? 2.9 Cash Flow to Stockholders and Creditors Could a company’s cash flow to stockholders be negative in a given year? (Hint: Yes.) Explain how this might come about. What about cash flow to creditors? 2.10 Firm Values In February 2017, Toshiba announced that it was writing off $6.3 billion due to its acquisition of nuclear power plant construction firm CB&I Stone & Webster only a year before. We would argue that Toshiba’s stockholders probably didn’t suffer as a result of the reported loss.
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