Ross5eChap02sm

# Ross5eChap02sm - Chapter 2: Accounting Statements and Cash...

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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

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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
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

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c.
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## This note was uploaded on 07/18/2010 for the course ECONMICS ECM359 taught by Professor Matazi during the Summer '10 term at University of Toronto.

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Ross5eChap02sm - Chapter 2: Accounting Statements and Cash...

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