Ross5eChap02sm - Chapter 2 Accounting Statements and Cash...

Info iconThis preview shows pages 1–5. Sign up to view the full content.

View Full Document Right Arrow Icon
Chapter 2: Accounting Statements and Cash Flow 2.1 The balance sheet for the company looks like this: Balance Sheet Cash $175,000 Accounts payables $430,000 Accounts receivable 140,000 Notes payable 180,000 Inventory 265,000 Current liabilities $610,000 Current assets $580,000 Long–term debt 1,430,000 Total liabilities $2,040,000 Tangible net fixed asset 2,900,000 Intangible net fixed assets 720,000 Common stock ?? Retained Earnings 1,240,000 Total assets $4,200,000 $4,200,000 $4,200,000 Total liabilities and owners’ equity is: Solving for this equation for equity gives us: Common stock = $4,200,000 – 1,240,000 – 2,040,000 Common stock = $920,000 2.2 The long–term debt account will increase by $8 million, the amount of the new long–term debt issue. Since the company sold 10 million new shares of stock with a $1 par value, the common stock account will increase by $10 million. The capital surplus account will increase by $16 million, the value of the new stock sold above its par value. Since the company had a net income of $7 million, and paid $4 million in dividends, the addition to retained earnings was $3 million, which will increase the accumulated retained earnings account. So, the new long–term debt and stockholders’equity portion of the balance sheet will be: Long–term Debt $68,000,000 Preferred Stock 18,000,000 Common Stock ($1 par value) 35,000,000 Retained Earnings $141,000,00 0 Capital Surplus 16,000,000 Total Liabilities & Equity $278,000,00 0
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
2.3 a. The interest expense for the company is the amount of debt times the interest rate on the debt. So, the income statement for the company is: Income Statement Sales $1,000,00 0 Cost of goods sold 300,000 Selling costs 200,000 Depreciation 100,000 EBIT $400,000 Interest 100,000 Taxable income $300,000 Taxes (35%) 105,000 Net income $195,000 b. And the operating cash flow is: OCF = EBIT + Depreciation – Taxes OCF = $400,000 + 100,000 – 105,000 OCF = $395,000 2.4 a. OCF = EBIT + Depreciation – Taxes OCF = $47,100 + 7,000 – 12,840 OCF = $41,260 b. CFC = Interest – Net new LTD CFC = $15,000 – (–$6,500) CFC = $21,500 Note that the net new long–term debt is negative because the company repaid part of its long term debt. c. CFS = Dividends – Net new equity CFS = $8,700 – 6,450 CFS = $2,250 d. We know that CFA = CFC + CFS, so: CFA = $21,500 + 2,250 = $23,750 CFA is also equal to OCF – Net capital spending – Change in NWC. We already know OCF. Net capital spending is equal to: Net capital spending = Increase in NFA + Depreciation Net capital spending = $5,000 + 7,000 Net capital spending = $12,000 Now we can use: CFA = OCF – Net capital spending – Change in NWC $23,750 = $41,260 – 12,000 – Change in NWC. Answers to End-of-Chapter Problems B- 7
Background image of page 2
Solving for the change in NWC gives $5,510, meaning the company increased its NWC by $5,510. 2.5 With the information provided, the cash flows from the firm are the capital spending and the change in net working capital, so: Cash flows from the firm Capital spending $(3,000) Additions to NWC (1,000) Cash flows from the firm $(4,000) And the cash flows to the investors of the firm are: Cash flows to investors of the firm Sale of short-term debt $(7,000) Sale of long-term debt (18,000) Sale of common stock (2,000) Dividends paid 23,000 Cash flows to investors of the firm $(4,000) 2.6 a. The income statement is : Income Statement Sales $12,800 Cost of good sold 10,400 Depreciation 1,900 EBIT 500 Interest 450 Taxable income 50 Taxes (34%) 17 Net income 33 b. OCF = EBIT + Depreciation – Taxes OCF = $500 + 1,900 – 17 OCF = $2,383 Answers to End-of-Chapter Problems B- 8
Background image of page 3

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
c.
Background image of page 4
Image of page 5
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}

Page1 / 12

Ross5eChap02sm - Chapter 2 Accounting Statements and Cash...

This preview shows document pages 1 - 5. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online