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Use the percent of sales method to prepare a 2004 pro

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Unformatted text preview: ro forma income statement for Euro Designs, Inc. b. Explain why the statement may underestimate the company’s actual 2004 pro forma income. 130 PART 1 Introduction to Managerial Finance PROBLEMS LG1 3–1 Depreciation On March 20, 2003, Norton Systems acquired two new assets. Asset A was research equipment costing $17,000 and having a 3-year recovery period. Asset B was duplicating equipment having an installed cost of $45,000 and a 5-year recovery period. Using the MACRS depreciation percentages in Table 3.2 on page 100, prepare a depreciation schedule for each of these assets. LG2 3–2 Accounting cash flow A firm had earnings after taxes of $50,000 in 2003. Depreciation charges were $28,000, and a $2,000 charge for amortization of a bond discount was incurred. What was the firm’s accounting cash flow from operations (see Equation 3.1) during 2003? LG1 LG2 3–3 MACRS depreciation expense and accounting cash flow Pavlovich Instruments, Inc., a maker of precision telescopes, expects to report pre-tax income of $430,000 this year. The company’s financial manager is considering the timing of a purchase of new computerized lens grinders. The grinders will have an installed cost of $80,000 and a cost recovery period of 5 years. They will be depreciated using the MACRS schedule. a. If the firm purchases the grinders before year end, what depreciation expense will it be able to claim this year? (Use Table 3.2 on page 100.) b. If the firm reduces its reported income by the amount of the depreciation expense calculated in part a, what tax savings will result? c. Assuming that Pavlovich does purchase the grinders this year and that they are its only depreciable asset, use the accounting definition given in Equation 3.1 to find the firm’s cash flow from operations for the year. LG1 LG2 3–4 Depreciation and accounting cash flow A firm in the third year of depreciating its only asset, which originally cost $180,000 and has a 5-year MACRS recovery period, has gathered the following data relative to the current year’s operations. Accruals Current assets Interest expense Sales revenue Inventory Total costs before depreciation, interest, and taxes Tax rate on ordinary income $ 15,000 120,000 15,000 400,000 70,000 290,000 40% a. Use the relevant data to determine the accounting cash flow from operations (see Equation 3.1) for the current year. b. Explain the impact that depreciation, as well as any other noncash charges, has on a firm’s cash flows. LG2 3–5 Classifying inflows and outflows of cash Classify each of the following items as an inflow (I) or an outflow (O) of cash, or as neither (N). CHAPTER 3 Item Change ($) Cash Accounts payable Notes payable Long-term debt Inventory Fixed assets LG2 3–6 Cash Flow and Financial Planning 100 1,000 500 2,000 200 400 Item 131 Change ($) Accounts receivable Net profits Depreciation Repurchase of stock Cash dividends Sale of stock 700 600 100 600 800 1,000 Finding operating and free cash flows Consider the balance sheets and selected data from the income statement of Keith Corporation that follow. a. Calculate the firm’s accounting cash flow from operations for the year ended December 31, 2003, using Equation 3.1. b. Calculate the firm’s operating cash flow (OCF ) for the year ended December 31, 2003, using Equation 3.2. c. Calculate the firm’s free cash flow (FCF ) for the year ended December 31, 2003, using Equation 3.3. d. Interpret, compare, and contrast your cash flow estimates in parts a, b, and c. Keith Corporation Balance Sheets December 31 Assets Cash Marketable securities Accounts receivable Inventories Total current assets Gross fixed assets Less: Accumulated depreciation Net fixed assets Total assets 2003 2002 $ 1,500 1,800 2,000 2,900 $ 8,200 $29,500 14,700 $14,800 $23,000 $ 1,000 1,200 1,800 2,800 $ 6,800 $28,100 13,100 $15,000 $21,800 $ 1,600 2,800 200 $ 4,600 $ 5,000 $10,000 3,400 $13,400 $23,000 $ 1,500 2,200 300 $ 4,000 $ 5,000 $10,000 2,800 $12,800 $21,800 Liabilities and Stockholders’ Equity Accounts payable Notes payable Accruals Total current liabilities Long-term debt Common stock Retained earnings Total stockholders’ equity Total liabilities and stockholders’ equity Income Statement Data (2003) Depreciation expense Earnings before interest and taxes (EBIT) Taxes Net profits after taxes $11,600 2,700 933 1,400 132 PART 1 Introduction to Managerial Finance LG4 3–7 Cash receipts A firm has actual sales of $65,000 in April and $60,000 in May. It expects sales of $70,000 in June and $100,000 in July and in August. Assuming that sales are the only source of cash inflows and that half of them are for cash and the remainder are collected evenly over the following 2 months, what are the firm’s expected cash receipts for June, July, and August? LG4 3–8 Cash disbursements schedule Maris Brothers, Inc., needs a cash disbursement schedule for the months of April, May, and June. Use the format of Table 3.9 and the following information in its pre...
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