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Homework 1 – Chapter 2 1.

Wims, Inc., has current assets of $5,400, net fixed assets of $23,700, current liabilities of $4,700, and long-term debt of $11,500. a.

What is the value of the shareholders’ equity account for this firm? (Do not round intermediate calculations.) 12,900

b.

How much is net working capital? (Do not round intermediate calculations.) 700 We know that total liabilities and owners' equity (TL & OE) must equal total assets of $29,100. We also know that TL & OE is equal to current liabilities plus long-term debt plus owners' equity, so owners' equity is:

Owners' equity = $29,100 – 11,500 – 4,700 Owners' equity = $12,900 And net working capital (NWC) is: NWC = Current assets – Current liabilities NWC = $5,400 – 4,700 NWC = $700 2.

Griffin's Goat Farm, Inc., has sales of $680,000, costs of $342,000, depreciation expense of $86,000, interest expense of $53,000, and a tax rate of 23 percent. What is the net income for this firm? (Do not round intermediate calculations.) 153,230 The income statement for the company is: Income Statement Sales $ 680,000 Costs 342,000 Depreciati 86,000 on EBIT Interest EBT Taxes (23%) Net income

$

252,000 53,000

$

199,000 45,770

$

153,230

3.

Griffins Goat Farm, Inc., has sales of $675,000, costs of $337,000, depreciation expense of $81,000, interest expense of $50,500, a tax rate of 23 percent, and paid out $42,500 in cash dividends. The firm has 28,800 shares of common stock outstanding. a.

What are the earnings per share figure? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) 5.52

b.

What are the dividends per share figure? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) 1.48

The income statement for the company is: Income Statement Sales $ 675,000 Costs 337,000 Depreciati 81,000 on EBIT Interest EBT Taxes (23%) Net income

$

257,000 50,500

$

206,500 47,495

$

The EPS = EPS = EPS = $5.52 per share

159,005

earnings per share (EPS) are: Net income/Shares $159,005/28,800

And the dividends per share (DPS) are: DPS = Dividends/Shares DPS = $42,500/28,800 DPS = $1.48 per share 4.

The 2017 balance sheet of Dream, Inc., showed current assets of $3,165 and current liabilities of $1,460. The 2018 balance sheet showed current assets of $3,220 and current liabilities of $1,660. What was the company’s 2018 change in net working capital, or NWC? (Do not round intermediate calculations. A negative answer should be indicated by a minus sign.) Change in NWC -$145 Change in NWC = NWCend – NWCbeg

5.

Change in NWC = (CAend – CLend) – (CAbeg – CLbeg) Change in NWC = ($3,220 – 1,660) – ($3,165 – 1,460) Change in NWC = $1,560 – 1,705 Change in NWC = –$145 The 2017 balance sheet of Kerber's Tennis Shop, Inc., showed long-term debt of $5.6 million, and the 2018 balance sheet showed long-term debt of $5.8 million. The 2018 income statement showed an interest expense of $185,000. During 2018, the company had a cash flow to creditors of –$15,000 and the cash flow to stockholders for the year was $65,000. Suppose you also know that the firm’s net capital spending for 2018 was $1,410,000, and that the firm reduced its net working capital investment by $77,000. What was the firm’s 2018 operating cash flow, or OCF? Solution: Cash flow from assets = cash flow to creditors + cash flow to stockholders Cash flow from assets = -15,000 + 65,000 = 50,000 Cash flow from assets = OCF – changes in working capital – net capital spending 50,000 = OCF – (-77,000) – 1,410,000 OCF = 50,000 -77,000 + 1,410,000 = Operating cash flow 1,383,000

6.

Square Hammer Corp. shows the following information on its 2018 income statement: Sales = $264,000; Costs = $170,000; Other expenses = $7,900; Depreciation expense = $14,500; Interest expense = $13,300; Taxes = $20,405; Dividends = $10,000. In addition, you are told that the firm issued $4,800 in new equity during 2018 and redeemed $3,300 in outstanding long-term debt. a.

What is the 2018 operating cash flow? (Do not round intermediate calculations.) Solution: A. operating cash flow = EBIT + depreciation EBIT = sales – cost – other expenses – depreciation =264,000 – 170,000 – 7,900 – 14,500 = 71,600 Operating cash flow = 71,600 + 14,500 – 20,405 = 65,695

b. What is the 2018 cash flow to creditors? (Do not round intermediate calculations.) Solution: B. cash flow to creditor = redeemed long-term debt + interest = $3,300 + 13,300 = 16,600 c. What is the 2018 cash flow to stockholders? (Do not round intermediate calculations.) Solution: C. cash flow to stockholder = dividends – issued equity = 10,000 – 4,800 = 5,200 d. If net fixed assets increased by $28,000 during the year, what was the addition to NWC? (Do not round intermediate calculations.) NWC increase by 1,395.

Explanation: Computation of Additions to Retained Earnings: OCF = EBIT + Depreciation - Taxes = $71,600 + $14,500 - $20,405 = $65,695 Cash Flow to Creditors = Interest paid - Net New Borrowing = $13,300 - (-$3,300) = $16,600 Cash Flow to Stockholders = Dividends Paid - Net New Equity = $10,000 - $4,800 = $5,200 Net Capital Spending = Depreciation + Increase in Fixed Assets = $14,500 + $28,000 = $42,500 Cash Flow from Assets = Cash Flow to Creditors + Cash Flow to Stockholders = $16,600 + $5,200 = $21,800 Cash Flow from Assets = OCF - Change in NWC - Net capital spending $21,800 = $65, 695-Change in NWC - $42,500 Change in NWC = $65,695 - $21,800 - $42,500 Change in NWC = $1,395 So, Addition to Retained Earnings is $1,395. To find the OCF, we first calculate net income. Income Statement Sales

$

Costs

170,000

Other expenses Depreciati on

EBIT

7,900 14,500

$

Interest

Taxable income

Dividends

71,600 13,300

$

Taxes

Net income

264,000

58,300 20,405

$

37,895

$

10,000

Additions to RE

7.

$

27,895

Square Hammer Corp. shows the following information on its 2018 income statement: Sales = $235,000; Costs = $141,000; Other expenses = $7,900; Depreciation expense = $14,600; Interest expense = $14,900; Taxes = $19,810; Dividends = $12,000. In addition, you are told that the firm issued $6,400 in new equity during 2018 and redeemed $4,900 in outstanding long-term debt. a.

What is the 2018 operating cash flow? (Do not round intermediate calculations.) Solution: A. operating cash flow = EBIT + depreciation EBIT = sales – cost – other expenses – depreciation =235,000– 141,000 – 7,900 – 14,600 = 71,500 Operating cash flow = 71,500 + 14,600 – 19,810 = 66,290

b.

What is the 2018 cash flow to creditors? (Do not round intermediate calculations.) Solution: B. cash flow to creditor = redeemed long-term debt + interest = $4,900 + 14,900 = 19,800

c.

What is the 2018 cash flow to stockholders? (Do not round intermediate calculations.) Solution: C. cash flow to stockholder = dividends – issued equity = 12,000 – 6,400 = 5,600

d.

If net fixed assets increased by $25,000 during the year, what was the addition to NWC? (Do not round intermediate calculations.) Explanation: Computation of Additions to Retained Earnings: OCF = EBIT + Depreciation - Taxes = $71,500+ $14,600 - $19,810 = $66,290 Cash Flow to Creditors = Interest paid - Net New Borrowing =$14,900-(-$4,900) = $19,800 Cash Flow to Stockholders = Dividends Paid - Net New Equity = $12,000 - $6,400 = $5,600 Net Capital Spending = Depreciation + Increase in Fixed Assets = $14,600 + $25,000 = $39,600 Cash Flow from Assets = Cash Flow to Creditors + Cash Flow to Stockholders = $19,800 + $5,600 = $25,400 Cash Flow from Assets = OCF - Change in NWC - Net capital spending $25,400 = 66,290- Change in NWC - $39,600 Change in NWC = $66,290 - $25,400 - $39,600

Change in NWC = $1,290 So, Addition to Retained Earnings is $1,290. To find the OCF, we first calculate net income.

Income Statement Sales

$

Costs

235,000 141,000

Other expenses Depreciati on

EBIT

7,900 14,600

$

Interest

Taxable income

71,500 14,900

$

Taxes

56,600 19,810

Net income

$

36,790

Dividends

$

12,000

Additions to RE

$

24,790

8.

You are given the following information for Bowie Pizza Co.: Sales = $72,000; Costs = $32,300; Addition to retained earnings = $6,500; Dividends paid = $2,220; Interest expense = $5,200; Tax rate = 23 percent. Calculate the depreciation expense. (Do not round intermediate calculations.) Depreciation Expenses = $23,175.32 Explanation: Net Income = Addition to retained earnings + Dividends paid = $6,500 + $2,220 = $8,720 Earnings Before Tax (EBT) = Net Income / (1 - Tax Rate)

= $8,720 / (1 - 0.23) = $8,720 / 0.77 = $11,324.68 Earnings Before Interest & Tax (EBIT) = Earnings Before Tax + Interest Expenses = $11,324.68 + $5,200 = $16,524.68 Depreciation Expense for the Company Earnings Before Interest & Tax (EBIT) = Sales - Costs - Depreciation Expenses $16,524 = $72,000 - $32,300 - Depreciation Expenses $16,524 = $39,700- Depreciation Expenses Depreciation Expenses = $39,700- $16,524.68 Depreciation Expenses = $23,175.32 9.

Which one of the following accounts is the most liquid? Multiple Choice 

Inventory



Building



Accounts Receivable



Equipment



Land

10.

11.

Which one of the following is the financial statement that shows the accounting value of a firm's equity as of a particular date? Multiple Choice 

Income statement



Creditor's statement



Balance sheet



Statement of cash flows



Dividend statement

Which one of the following is the financial statement that summarizes a firm's revenue and expenses over a period of time? Multiple Choice



Income statement



Balance sheet



Statement of cash flows



Tax reconciliation statement



Market value report

12.

Noncash items refer to: Multiple Choice 

fixed expenses.



inventory items purchased using credit.



the ownership of intangible assets such as patents.



expenses that do not directly affect cash flows.



sales that are made using store credit....