problem sets solutions 1 accounting statements and cash flow

7/24/2019 Problem Sets Solutions 1 Accounting Statements and Cash Flow

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ACCOUNTING STATEMENTS AND CASH FLOW

Problem 1

Predator Pucks, Inc. has current assets of $4,000, net fixed assets of $22,500, currentliabilities of $3,400, and long-term debt of $6,800. What is the value of the shareholders’equity account for this firm? How much is net working capital?

ASSETS LIABILITIES & OWNERS' EQUITY

Current assets 4,000 Current liabilities 3,400

Net fixed assets 22,500 Long term debt 6,800

Owners' equity

Total assets 26,500 Total Liabilities + Equity 26,500

Owners' equity = 26,500 – 3,400 – 6,800 = 16,300

NWC = 4,000 – 3,400 = 600

Problem 2

Mama Roach Exterminators Inc. has sales of $634,000, COGS $305,000, depreciationexpense of $46,000, interest expense of $29,000 and tax rate of 35%. What is the net income

for this firm?

Sales 634,000

– Cost of Goods Sold 305,000

– Depreciation 46,000

= EBIT 283,000

– Interest 29,000

= Taxable income 254,000

– Tax (tax rate = 35%) 88,900

= Net income 165,100



Problem 3

Parrothead Enterprises – Balance Sheets 2010 & 2011

Assets Liabilities & Owners' Equity

2010 2011 2010 2011

Current assets 725 785 Current liabilities 290 325

Net fixed assets 2990 3600 Long term debt 1580 1680

Owners' equity

Total assets Total Liab. + Equity

Parrothead Enterprises – Income statement 2011

Sales 9,200

– Cost of Goods Sold 4,290

– Depreciation 820

= Operating Income/EBIT 4,090

– Interest 234

= Pre-tax/Taxable income 3,856

– Tax 3,856 x 35% = 1,349.6

= Net income

a. Find owners’ equity in at the end of each year?

Total assets 2010 = $725 + 2,990 = $3,715

Owners’ equity 2010 = $3,715 – $290 – $1,580 = $1,845

Total assets 2011 = $785 + 3,600 = $4,385

Owners’ equity 2011 = $4,385 – $325 – $1,680 = $2,380

b.

Find the change in net working capital?

NWC = Current assets – Current liabilities NWC 2010 = $725 – 290 = $435

NWC 2011 = $785 – 325 = $460

Change in NWC = NWC 2011 – NWC 2010 = $460 – 435 = $25



c. The firm purchased $1,500 new fixed assets during the year. What is the amount of findfixed assets sold during the year? Calculate CF from assets.

Net capital spending (or Investment in FA) = FA bought – FA sold

Investment in FA = Net FA 2011 – Net FA 2010 + Depreciation

= $3,600 – 2,990 + 820 = $1,430

Fixed assets sold = $1,500 – 1,430 = $70

Cash flow from assets

(1) EBIT 4,090

+ depreciation 820

– Current taxes 1,349.6

= Operating CF 3,560.4

(2) Investment in FA: 1,430

(3) Change in net working capital 25

CF from assets = (1) – (2) – (3) 2,105.4

d. The firm raised $300 new long-term debt during the year. What is the amount of debt paidoff during the year? Calculate CF to creditors (bondholders).

Net borrowing = Debt issued – Debt paidoff Net borrowing = LT debt 2011 – LT debt 2010

= 1,680 – 1,580 = 100

Debt paidoff = 300 – 100 = 200

Cash flow to creditors

Interest paid 234

– Net new borrowing 100

CF to creditors 134



Problem 4

Calculate CF from Assets, CF to Bondholders, and CF to Stockholders for WildHack.

WildHack 2011 Income Statement ($ million)

Sales 3,756COGS 2,453Depreciation 490EBIT 813Interest 613Taxable income 200Taxes 68

Net income 132

Dividends 46Addition to retained earnings 86

WildHack Balance Sheets as of December 31, 2010 and 2011

2010 2011AssetsCurrent assets

Cash 120 88A/R 224 192Inventory 424 368

Total 768 648

Fixed assets Net plant and equipment 5,228 5,354

Total assets 5,996 6,002======== ========

Liabilities & Owners' equityCurrent liabilities

A/P 124 144 N/P 1,412 1,039

Total 1,536 1,183

Long term debt 1,804 2,077

Owners' equityCommon stock and paid in surplus 300 300

Retained earnings 2,356 2,442Total 2,656 2,742

Total Liabilities + Equity 5,996 6,002======== ========



Financial Cash Flow Worksheet

CF from assets CF to bondholders & stockholders

(1) Operating CF (1) Cash flow to creditors

EBIT 813 Interest paid 613

+ depreciation 490 – Net new borrowing (**) 273

– current taxes 68 = CF to creditors 340

= Operating CF 1235

(2) Investment in Fixed assets (FA) (2) Cash flow to stockholders

Ending Net FA 5354 Dividends 46

– Beginning Net FA 5228 – Net new equity (***) 0

+ Depreciation 490 = CF to stockholders 46

= Investment in FA(or Net Capital Spending)

616

(3) Change in networking capital (NWC)

Ending NWC (*) -535

– Beginning NWC (*) -768

= Change in NWC 233

CF from assets= (1) – (2) – (3)

386 Cash flow to bondholders& stockholders = (1) + (2)

386

(*) NWC = Current assets – Current liabilitiesEnding NWC = 648 – 1183 = -535

Beginning NWC = 768 – 1536 = -768

(**) Net new borrowing = Ending LT debt – Beginning LT debt= 2077 – 1804 = 273

(***) Net new equity = Ending Common stock & paid in surplus – Beginning CS & PIS= 300 – 300 = 0

problem sets solutions 1 accounting statements and cash flow

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