F317+Study+Guide+9+Ch+5+Answers+Spring+2011

F317+Study+Guide+9+Ch+5+Answers+Spring+2011 - Study Guide 9...

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Study Guide 9 Answers Chapter 5 EVALUATING FINANCIAL PERFORMANCE 5. The Castillo Products Company was started in 2006. The company manufactures components for personal decision assistant (PDA) products and for other hand-held electronic products. A difficult operating year 2007 was followed by a profitable 2008. However, the founders (Cindy and Rob Castillo) are still concerned about the venture’s liquidity position and the amount of cash being used to operate the firm. Following are income statements and balance sheets for the Castillo Products Company for 2007 and 2008. CASTILLO PRODUCTS COMPANY 2007 2008 Net Sales $900,000 $1,500,000 Cost of Goods Sold 540,000 900,000 Gross Profit 360,000 600,000 Marketing 90,000 150,000 General & Administrative 250,000 250,000 Depreciation 40,000 40,000 EBIT (20,000) 160,000 Interest 45,000 60,000 Earnings Before Taxes (65,000) 100,000 Income Taxes 0 25,000 Net Income (Loss) ($65,000) $75,000 2007 2008 Cash $50,000 $20,000 Accounts Receivables 200,000 280,000 Inventories 400,000 500,000 Total Current Assets 650,000 800,000 Gross Fixed Assets 450,000 540,000 Accumulated Depreciation -100,000 -140,000 Net Fixed Assets 350,000 400,000 Total Assets $1,000,000 $1,200,000 Accounts Payable $130,000 $160,000 Accruals 50,000 70,000 Bank Loan 90,000 100,000 Total Current Liabilities 270,000 330,000 Long-Term Debt 300,000 400,000 Common Stock 150,000 150,000 Paid-in-Capital 200,000 200,000 Retained Earnings 80,000 120,000 Total Liab. & Equity $1,000,000 $1,200,000 71
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Chapter 5: Evaluating Financial Performance A. Use year-end data to calculate the current ratio, the quick ratio, and the net working capital (NWC) to total assets ratio for 2007 and 2008 for the Castillo Company. What changes occurred? Current Ratio = Current Asset/Current Liabilities Year 2007: $650,000/$270,000 = 2.41 Year 2008: $800,000/$330,000 = 2.42 Quick Ratio = (CA - Inventories)/CL Year 2007: ($650,000 - $400,000)/$270,000 = 0.93 Year 2008: ($800,000 - $500,000)/$330,000 = 0.91 NWC to Total Assets Ratio = (CA - CL)/Assets Year 2007: ($650,000 - $270,000)/$1,000,000 = 0.38 Year 2008: ($800,000 - $330,000)/$1,200,000 = 0.39 B. Use Castillo’s complete income statement data and the changes in balance sheet items between 2007 and 2008 to determine the firm’s cash build and cash burn for 2008. Did Castillo have a net cash build or net cash burn for 2008? Cash Build = Sales – Change in Accounts Receivable = $1,500,000 - $80,000 = $1,420,000 Cash Burn = Inventory-Related Purchases + Administrative Expenses + Marketing Expenses + Interest Expense - (Change in Accrued Liabilities + Change in Payables) + Capital Investments + Taxes = ($900,000 + + $250,000 + $150,000 + $60,000 + $25,000 + $100,000 - ($20,000 + $30,000) + $90,000 = $1,525,000 Net Cash Burn or Build = Cash Build – Cash Burn = $1,420,000 - $1,525,000
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F317+Study+Guide+9+Ch+5+Answers+Spring+2011 - Study Guide 9...

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