Dr. Sudhakar Raju
FN 3000
QUESTIONS FOR CHAPTER 2 (Financial Statements, Taxes and Cash Flows)
1. Brentwood Bat factory, Inc., has current assets of $3,400; net fixed assets of $7,100; current liabilities
of $1,900 and long-term debt of $5,200. What is the value of shareholders’ equity for this firm? How
much is net working capital?
2. Hoobstank, Inc., has sales of $565,000; costs of $240,000; depreciation expense of $74,000; interest
expense of $41,000 and a tax rate of 35 percent. What is the net income for this firm?
3. Suppose the firm in Problem 2 paid out $45,000 in cash dividends. What is the addition to retained
earnings?
4. Suppose the firm in Problem 3 had 30,000 shares of common stock outstanding. What is the
earnings per share or EPS value? What is the dividends per share value?
5. Klingon Widgets purchased new cloaking machinery three years ago for $5 million. The machinery can
be sold to the Romulans for $4.6 million. Klingon’s current balance sheet shows net fixed assets of
$2,500,000; current liabilities of $875,000; and net working capital of $700,000. If all the current assets
were liquidated today, the company would receive $1.6 million in cash. What is the book value of
Klingon’s assets today? What is the market value?
6. Side Salad, Inc., has sales of $15,430, costs of $5780, depreciation expense of $1,900, and interest
expense of $1,450. If the tax rate is 35 percent, what is the operating cash flow, or OCF?
7. Rotweiler Obedience School’s December 31, 2007, balance sheet showed net fixed assets of $2.95
million, and the December 31, 2008, balance sheet showed net fixed assets of $3.36 million. The
company’s 2008 income statement showed a depreciation expense of $280,000. What was Rotweiler’s
net capital spending for 2008?
8. The December 31, 2007, balance sheet of Roddick’s Tennis Shop, Inc., showed current assets of $900
and current liabilities of $310. The December 31, 2008, balance sheet showed current assets of $920
and current liabilities of $305. What was the company’s 2008 change in net working capital, or NWC?
9. The December 31, 2007 balance sheet of Rack N Pinion, Inc., showed long-term debt of $1.7 million,
and the December 31, 2008, balance sheet showed long-term debt of $1.9 million. The 2008 income
statement showed an interest expense of $65,000. What was the firm’s cash flow to creditors during
2008?
10. Greene Co. shows the following information on its 2008 income statement:
Sales
$127,000
Costs
$64,300
Other expenses
$3,900
Depreciation expense $9,600
Interest expense
$7,100
Taxes
$15,210
Dividends
$8,400
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In addition, you’re told that the firm issued $2,500 in new equity during 2008, and redeemed $3,800 in
outstanding long-term debt.
a. What is the 2008 operating cash flow?
b. What is the 2008 cash flow to creditors?
c. What is the 2008 cash flow to stockholders?
d. If net fixed assets increased by $13,600 during the year, what was the addition to NWC?
11. Prepare a balance sheet for Florida Potato Corp. as of December 31, 2008, based on the following
information:
Cash
Patents and copyrights
Accounts payable
Accounts receivable
Tangible net fixed assets
Inventory
Notes payable
Accumulated retained earnings
Long-term debt
$234,000
$818,000
$627,000
$241,000
$4,700,000
$498,000
$176,000
$4,230,000
$913,000
12. During 2008, Belyk Paving Co. had sales of $3,100,000. Cost of goods sold, administrative and selling
expenses, and depreciation expenses were $1,940,000; $475,000; and $530,000 respectively. In
addition, the company had an interest expense of $210,000 and a tax rate of 35 percent. (Ignore any tax
loss carry back or carry forward provisions).
a. What is Belyk’s net income for 2008?
b. What is its operating cash flow?
c. Explain your results in (a) and (b).
13. In the problem above, suppose Belyk Paving Co. paid out $500,000 in cash dividends. Is this
possible? If no new investments were made in net fixed assets or net working capital, and if no new
stock was issued during the year, what do you know about the firm’s long-term debt account?
14. Titan Football Manufacturing had the following operating results for 2008:
Sales
Cost of goods sold
Depreciation expense
Interest expense
Dividends paid $380
$15,370
$11,340
$2,020
$210
At the beginning of the year, net fixed assets were $10,080, current assets were $2,520, and current
liabilities were $1,890. At the end of the year, net fixed assets were $10,580; current assets were
$3,910; and current liabilities were $2,270. The tax rate for 2008 was 35 percent.
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a.
b.
c.
d.
What is net income for 2008?
What is the operating cash flow for 2008?
What is the cash flow from assets for 2008? Is this possible? Explain.
If no new debt was issued during the year, what is the cash flow to creditors? What is the cash
flow to stockholders? Explain and interpret the positive and negative signs of your answers in
(a) through (d).
15. Consider the following abbreviated financial statements for Cabo Wabo, Inc.:
CABO WABO, INC.
Partial Balance Sheets as of December 31, 2007 and 2008
2007
2008
2007
Assets
Current assets
$1,710 $1,811
Net fixed assets
7,920
8,280
CABO WABO, INC.
2008 Income Statement
Sales
$ 25,560
Costs
12,820
Depreciation
2,160
Interest paid
389
Liabilities and Owner's
Equity
Current liabilities
Long-term debt
$738
$4,320
2008
$1,084
5,040
a. What is owners’ equity for 2007 an 2008?
b. What is the change in net working capital for 2008?
c. In 2008, Cabo Wabo purchased $3,600 in new fixed assets. How much in fixed assets did Cabo
Wabo sell? What is the cash flow from assets for the year? (The tax rate is 35 percent.)
d. During 2008 Cabo Wabo raised $1,080 in new long-term debt. How much long-term debt must
Cabo Wabo have paid off during the year? What is the cash flow to creditors?
16. Find Your Way Back, Inc. reported the following financial statements for the last two years.
Construct the cash flow identity for the company. Explain what each number means.
FIND YOUR WAY BACK, INC.
Balance Sheet as of December 31, 2007
Assets
Liabilities
Cash
$18,500 Accounts Payable
Accounts receivable
26,380 Notes payable
Inventory
19,157 Current liabilities
Current assets
$64,037
Net fixed assets
$13,200
20,150
$33,350
$478,370 Long-term debt
$190,000
Owners' equity
$319,057
Total Assets $542,407
Total Liabilities & Owners Equity $542,407
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FIND YOUR WAY BACK, INC.
Balance Sheet as of December 31, 2008
Assets
Liabilities
Cash
$19,870 Accounts Payable
Accounts receivable
29,305 Notes payable
Inventory
31,603 Current liabilities
Current assets
$80,778
Net fixed assets
$14,600
22,870
$37,470
$564,320 Long-term debt
$210,000
Owners' equity
$397,628
Total Assets $645,098
Total Liabilities & Owners Equity $645,098
2008 Income Statement
Sales
$785,000
Cost of goods sold
380,590
Selling & administrative
173,240
Depreciation
75,800
EBIT
$155,370
Interest
26,800
EBT
$128,570
Taxes
44,999
Net income
$83,571
Dividends
Addition to retained
earnings
$15,000
$68,571
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