Income Statement and Cash Flows

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E1-5
The following information was taken from the 2006 financial statements of pharmaceutical giant Merck and Co. All dollar amounts are in millions.

Retained earnings, January 1, 2006
$37,980.0
Materials and production expense
6,001.1
Marketing and administrative expense
8,165.4
Dividends
3,318.7
Sales revenue
22,636.0
Research and development expense
4,782.9
Tax expense
1,787.6
Other revenue
2,677.1

Hint: Prepare income statement and retained earnings statement. (SO 4)

Instructions

(a)
After analyzing the data, prepare an income statement and a retained earnings statement for the year ending December 31, 2006.

(b)
Suppose that Merck decided to reduce its research and development expense by 50%. What would be the short-term implications? What would be the long-term implications? How do you think the stock market would react?

E1-12
This information is for Damon Corporation for the year ended December 31, 2010.

Cash received from lenders
$20,000
Cash received from customers
60,000
Cash paid for new equipment
35,000
Cash dividends paid
8,000
Cash paid to suppliers
18,000
Cash balance 1/1/10
12,000

Hint: Prepare a statement of cash flows.
(SO 5)

Instructions


Prepare the 2010 statement of cash flows for Damon Corporation.


Suppose you are one of Damon's creditors. Referring to the statement of cash flows, evaluate Damon's ability to repay its creditors.

E1-13
The following data are derived from the 2006 financial statements of Southwest Airlines. All dollars are in millions. Southwest has a December 31 year-end.

Cash balance, January 1, 2006
$2,280
Cash paid for repayment of debt
607
Cash received from issuance of common stock
260
Cash received from issuance of long-term debt
300
Cash received from customers
9,081
Cash paid for property and equipment
1,399
Cash paid for dividends
14
Cash paid for repurchase of common stock
800
Cash...
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