Problems-_Chapter_3

Problems-_Chapter_3 - Pamplin Inc Solution(Problem 3-7...

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Pamplin, Inc. Solution (Problem 3-7) Income Statement 2009 2010 Sales (All Credit) 1200 1,450 Less: Cost of Goods Sold 700 850 Gross Profit 500 600 Operating Expenses 30 40 Depreciation 220 200 Operating Income 250 360 Interest Expense 50 64 Income before taxes 200 296 Provision for Taxes 80 118 Net Income 120 178 Balance Sheet 2009 2010 Difference Assets Cash 200 150 (50) Accounts Receivable 450 425 (25) Inventory 550 625 75 Current Assets 1,200 1,200 0 Plant and Equipment 2,200 2,600 400 Less: Acc. Depreciation (1,000) (1,200) (200) 1,200 1,400 200 Total Assets 2,400 2,600 200 12/31/2005 12/31/2006 Accounts Payable 200 150 (50) Notes Payable (9%) 0 150 150 Current Liabilities 200 300 100 Bonds (8-1/3 %) 600 600 0 Owners's Equity Common Stock 900 900 0 Retained Earnings 700 800 100 Total Owners' Equity 1,600 1,700 100 2,400 2,600 200
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Pamplin, Inc. Solution (Problem 3-7) Free Cash Flow From an Asset Perspective Step 1: Compute After-Tax Cash Flow From Operations 360 Depreciation 200 560 Tax Expense 118 After-Tax Cash Flow From Operations 442 442 Easier Way Net Income 178 + Interest 64 + Depreciation 200 After-Tax Cash Flow From Operations 442 Step 2: Change in Net Operating Working Capital Change in Current Assets Change in Cash (50) Change in Accounts Receivable (25) Change in Inventory 75 Change in Current Assets 0 Change in Current Liabiities Change in Accounts Payable (50) Change in Notes Payable 150 Change in Current Liabilities 100 Change in Net Operating Working Capital 100 100 Step 3: Change in Long-Term Assets Purchase of Fixed Assets 400 (400) (Net fixed assets 2003 - 2002 plus depreciation 2003.) Asset Free Cash Flows 142 After-Tax Cash Flow From Operations 442 Plus: Change in Net Operating Working Capital 100 Plus: Change in Long-Term Assets (400) 142 Free Cash Flow from a Financing Perspective Interest Payment (64) Common Stock Dividends (1) (78) Financing Free Cash Flows (142) (142) (1) Net Income 2003 178 Retained Earnings Increased 100 Difference has to be dividends 78 You do not include notes payable in operating income because it is a financing cash flow.
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Decrease (source/plus) Decrease (source/plus) Increase (use/negative) No change Decrease (use/negative) Increase (source/positive) Source/Add Source/Add (use/negative) paid paid paid
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T.P. Jarmon Co. (Prob. 3-*0 Balance Sheet 2009 2010 Difference Cash $15,000 $14,000 ($1,000) Marketable Securities $6,000 $6,200 $200 Accounts Receivable $42,000 $33,000 ($9,000) Inventory $51,000 $84,000 $33,000 Prepaid Rent $1,200 $1,100 ($100) Total Current Assets $115,200 $138,300 $23,100 $286,000 $270,000 ($16,000) Total Assets $401,200 $408,300 Accounts Payable $48,000 $57,000 $9,000 Accruals $6,000 $5,000 ($1,000) Notes Payable $15,000 $13,000 ($2,000) Total Current Liabilities $69,000
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Problems-_Chapter_3 - Pamplin Inc Solution(Problem 3-7...

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