ACC 502 FT – FINANCIAL ACCOUNTING

Use EDGAR or the company’s website to download the latest 10-K of Southwest Airlines Co.
(LUV) (fiscal year ending December 31, 2021).
1. What is Southwest’s Balance Sheet Equation on December 31, 2021?

ANSWER (in millions)

Balance Sheet Equation:

Assets = Liabilities + Equity; $36,320 = 25,906 + 10,414;

2. What is Southwest’s Net Income and Basic EPS (Earnings Per Share) for the fiscal year
ending December 31, 2021?

ANSWER (in millions)

Net Income = $977
Basic EPS (Earnings Per Share) = $1,65

3. Did Southwest retain most of its Net Income from the fiscal year 2021, or did the
company declare some of it as dividends?

ANSWER
Southwest Airlines Co. retained all profit. No dividends

4. What is Southwest’s Net Operating Cash Flow for the fiscal year 2021?

ANSWER (in millions)

Net Operating Cash Flow = $2,322

5. Did Southwest’s Net Income for the year 2021 equal its Net Operating Cash Flow for that
fiscal year? Explain why.

ANSWER
No, Net Income for the year 2021 is not equal its Net Operating Cash Flow because these
are two different financial categories that are calculated differently. Net Cash Flow from
operating activities is calculated as the sum of Net Income, adjustments for Non-Cash
Expenses, and changes in working capital.

6. How much cash and cash equivalents did Southwest have on hand on December 31,
2021? On December 31, 2020?

ANSWER (in millions)

Cash and cash equivalents on December 31, 2021 = $12,480
Cash and cash equivalents on December 31, 2020 = $11,063
7. Out of Southwest’s main activities (operating, investing, and financing), which
activity(ies) provided a net inflow of cash and which activity(ies) provided a net outflow
of cash during the fiscal year 2021?

ANSWER (in millions)

Inflow: Operating = $2,322
Financing = $359
Outflow: Investing = $1,264

8. What is Southwest’s book value (of equity) and market value (of equity) on December
31, 2021? Did Southwest’s book value equal its market value on December 31, 2021?
What is Southwest’s market-to-book ratio? What does this market-to-book ratio indicate?
[Hint: The book value can be found on the company’s financial statements. For the
market value, you will need the company’s i) number of common shares outstanding on
December 31, 2021 (not the weighted number over the year), and ii) stock price on
December 31, 2021 (look up on the Internet, use the “closing” price as of December 31,
2021 adjusted for splits or adjusted for both splits and dividends)]

ANSWER (in millions)

Book value (of equity) = $10,414
Market value (of equity) = $25,366
Southwest’s book value is not equal its market value on December 31, 2021
Market-to-book ratio = 2.44
Market-to-book ratio indicate how much equity investors are paying for each dollar in net
assets;