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1.(Corporate income tax) Potts, Inc. had sales of $6 million during the past year. The cost of goods soldamounted to $3 million. Operating expenses totaled $2.6 million and interest expense was $30,000.Determine the firms tax liability.

2.(Measuring cash flows) Calculate the free cash flows for T.P. Jarmon, Inc., for the year ended December

31, 2003, both from an asset and a financing perspective. Interpret your results.

T.P. Jarmon, Inc. Balance Sheet at 12/31/02 and 12/31/03

ASSETS

2002 2003

CashMarketable securitiesAccounts receivableInventoryPrepaid rent

Total current assetsNet plant and equipment

Total assets

$15,0006,00042,00051,0001,200

115,200

286,000$401,200

$14,0006,20033,00084,0001,600

138,300

270,000

$408,300

LIABILITIES AND OWNERS EQUITY

2002 2003

Accounts receivableNotes payableAccruals

Total current liabilitiesLong-term debtCommon stockholders equity

Total liabilities and owners equity

$48,00015,0006,00069,000160,000172,200401,200

$57,00013,0005,00075,000150,000183,300408,300

T.P. Jarmon, Inc. Income Statement for year ending 12/31/03

SalesLess: cost of goods soldGross profitLess: expenses

General and administrative $30,000Interest 10,000Depreciation 30,000

Total operating expensesEarnings before taxesLess: taxesNet incomeLess: cash dividentsTo retained earnings

$600,000460,000

$140,000

70,00070,000

27,10042,90031,80011,100

3. (Measuring cash flows) Calculate the free cash flows for Abrams Manufacturing Company for the yearended December 31, 2003, both from an asset and a financing perspective. Interpret your results.Abrams Manufacturing Company Balance Sheets at 12/31/2002 and 12/31/2003

2002 2003Cash $ 89,000 $ 100,000

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Accounts receivableInventoryPrepaid expensesPlant and equipmentAccumulated depreciation

TotalAccounts Payable

Accruals liabilitiesMortgage payablePreferred stockCommon stockRetained earnings

Total liabilities and equity

64,000112,00010,000

238,000(40,000)

$ 473,000$ 85,000

68,00070,000

0205,00045,000

$ 473,000

70,000100,000

10,000311,000(66,000)

$ 525,000$ 90,000

63,0000

120,000205,000

47,000$ 525,000

Abrams Manufacturing Company Income Statement for the Year Ended 12/31/03

SalesCost of salesGross profit

Selling, general, and administrative expensesDepreciation expenseOperating incomeInterest expenseTaxesPreferred stock dividendsNet income

$ 184,00060,000

124,000

44,00026,000

$ 584,0004,000

16,00010,000

$ 24,000

Additional information:The firm paid $22,000 in common stock dividends during 2003.