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# Solutions to Cash Flow Problems

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### Solutions to Cash Flow Problems

1. 1. Extra Financial Statement & Cash Flow Problem Use the following information and assume the tax rate is 34% for questions a) and b) that follow. 2004 2005 Sales \$8,036 \$8,624 Depreciation 1,154 1,156 Cost of goods sold 2,764 3,138 Other expenses 656 548 Interest 538 618 Cash 4,214 4,310 Accounts receivable 5,578 6,284 Short-tern notes payable 814 764 Long-term debt 14,112 15,206 Net fixed assets 35,338 36,182 Accounts payable 4,426 4,292 Inventory 9,918 10,192 Dividends 980 1,078 a) Create and Income Statement and a Balance Sheet for each year. [Hint: You’ll need to add accounts to balance the balance sheet.}] b) For 2005 calculate the cash flow from assets, the cash flow to creditors, and the cash flow to stockholders. a) Income Statement Income Statement 2004 2005 Sales \$8,036 Sales \$8,624 Cost of Goods Sold 2,764 Cost of Goods Sold 3,138 Other Expenses 656 Other Expenses 548 Depreciation 1,154 Depreciation 1,156 EBIT 3,462 EBIT 3,782 Interest Expense 538 Interest Expense 618 EBT 2,924 EBT 3,164 Taxes (at 34%) 994 Taxes (at 34%) 1,076 Net Income 1,930 Net Income 2,088
2. 2. Balance Sheet Balance Sheet 2004 2005 Cash 4,214 A/P 4,426 Cash 4,310 A/P 4,292 A/R 5,578 N/P 814 A/R 6,284 N/P 764 Inv 9,918 CL 5,240 Inv 10,192 CL 5,056 CA 19,710 CA 20,786 NFA 35,338 LTD 14,112 NFA 36,182 LTD 15,206 Stockholders’ 35,696 Stockholders’ 36,706 Equity Equity Total 55,048 Total 55,048 Total 56,968 Total 56,968 b) Cash flow from assets = OCF – capital spending – change in NWC OCF = EBIT – taxes + depreciation = 3,782 – 1,076 + 1,156 = 3,862 Capital spending = change in NFA + depreciation = 844 + 1156 = 2,000 Change in NWC = NWC 2005 – NWC 2004 = (20786 – 5056) – (19710 – 5240) = 1260 Therefore Cash flow from assets = 3,862 – 2000 – 1260 = 602 Cash flow to creditors = interest + change in LTD = 618 to them and 1,094 from them for a net cash flow “to” them of 476 OR a (-476). Cash flow to stockholders = dividends + change in Stockholders’ Equity = 1,078 to them. The total cash flow is therefore to the investors in the amount of (-476) + 1,078 = 602 which is the cash flow from assets.
3. 3. Use the following information and assume the tax rate is 34% for questions a) and b) that follow. 2004 2005 Sales \$2,009 \$2,156 Depreciation 288.50 289 Cost of goods sold 691 784.50 Other expenses 164 137 Interest 134.50 154.50 Cash 1,053.50 1,077.50 Accounts receivable 1,394.50 1,571 Short-tern notes payable 203.50 191 Long-term debt 3,528 4,116 Net fixed assets 8,834.50 9,045.50 Accounts payable 1,106.50 1,073 Inventory 2,479.50 2,548 Dividends 245 269.50 a) Create and Income Statement and a Balance Sheet for each year. [Hint: You’ll need to add accounts to balance the balance sheet.}] b) For 2005 calculate the cash flow from assets, the cash flow to creditors, and the cash flow to stockholders. a) Income Statement Income Statement 2004 2005 Sales \$2,009 Sales \$2,156 Cost of Goods Sold 691 Cost of Goods Sold 784.50 Other Expenses 164 Other Expenses 137 Depreciation 288.50 Depreciation 289 EBIT 865.50 EBIT 945.5 Interest Expense 134.50 Interest Expense 154.5 EBT 731 EBT 791 Taxes (at 34%) 248.54 Taxes (at 34%) 269 Net Income 482.46 Net Income 522
4. 4. Balance Sheet Balance Sheet 2004 2005 Cash 1,053.50 A/P 1,106.50 Cash 1,077.50 A/P 1,073 A/R 1,394.50 N/P 203.50 A/R 1,571 N/P 191 Inv 2,479.50 CL 1,310 Inv 2,548 CL 1,264 CA 4,927.50 CA 5,196.50 NFA 8,834.50 LTD 3,528 NFA 9,045.50 LTD 4,116 Stockholders’ 8,924 Stockholders’ 8,862 Equity Equity Total 13,762 Total 13,762 Total 14,242 Total 14,242 b) Cash flow from assets = OCF – capital spending – change in NWC OCF = EBIT – taxes + depreciation = 945.50 – 269 + 289 = 965.50 Capital spending = change in NFA + depreciation = 211 + 289 = 500 Change in NWC = NWC 2005 – NWC 2004 = (5196.50 – 1264) – (4927.50 – 1310) = 315 Therefore Cash flow from assets = 965.50 – 500 – 315 = 150.50 Cash flow to creditors = interest + change in LTD = 154.50 to them and 588 from them for a net cash flow to them of 433.50 OR a (-433.50). Cash flow to stockholders = dividends + change in Stockholders’ Equity = 269.50 to them and an additional 314.50 to them in the form of repurchases for a net cash flow to stockholders of 584.* The total cash flow is therefore to the investors in the amount of (-433.50) + 584 = 150.50 which is the cash flow from assets. * There are two ways to see the cash flow to stockholders. (1) we can recognize that the decrease of 62 in the stockholder account was the result of three actions a. net income was added of 522, b. dividends were taken out in the amount of 269.50 and c. because the net income was greater than the dividends paid the decrease must have been the result of a repurchase and the repurchase had to be large enough to wipe out the remaining net income and produce a decrease of 62 so it had to be (522 – 269.50) + the 62 decrease or 584. (2) a second method would be to simply recognize that between the two activities we totally consumed the net income and 62 more so the cash flow to stockholders had to be 522 (net income) and the extra 62 (the difference in the stockholders’ equity account) = 584.