Chapter Two
Questions for PracticeQ.1. Based on the following information for Ahmad Corporation, prepare an
income statement for 2002 and balance sheets for 2001 and 2002. Calculate
cash flow from assets, cash flow to creditors, and cash flow to stockholders for
Ahmad Corporation for 2002. Use a 35 percent tax rate.
Sales
Cost of goods sold
Depreciation
Interest
Dividends
Current assets
Net fixed assets
Current liabilities
Long-term debt
2001
2002
SR4,203
2,422
785
180
225
2,205
7,344
1,003
3,106
SR4,507
2,633
952
196
250
2,429
7,650
1,255
2,085
Answer to question 1.
In preparing the balance sheets, remember that shareholders’ equity is the
residual. With this in mind, Ahmad Corporation’s balance sheets are as follows:
AHMAD CORPORATION
Balance sheets as of December 31, 2001 and 2002
Current liabilities
Long-term debt
Equity
Total liabilities and
shareholders’ equity
2001
1,003
3,106
5,440
9,549
2002
1,255 Current assets
2,085 Net fixed assets
6,739
10,079 Total assets
1
2001
2,205
7,344
2002
2,429
7,650
9,549
10,079
AHMAD CORPORATION
2002 Income Statement
Sales
Cost of goods sold
Depreciation
Earnings before interest and taxes
Interest paid
Taxable income
Taxes (35%)
Net income
Dividends
Addition to retained earnings
4,507
2,633
952
922
196
726
254
472
250
222
AHMAD CORPORATION
2002 Operating Cash Flow
Earnings before interest and taxes
+ Depreciation
- Taxes
Operating cash flow
922
952
254
1,620
Net capital spending for the year
Ending net fixed assets
7,650
- Beginning net fixed assets
7,344
+ Depreciation
952
Net capital spending
1,258
Change in NWC
Ending NWC
- Beginning NWC
Change in NWC
1,174
1,202
28
2
AHMAD CORPORATION
2002 Cash Flow from Assets
Operating cash flow
- Net capital spending
- Change in NWC
Cash flow from assets
1,620
1,258
28
390
AHMAD CORPORATION
2002 Cash Flow to Creditors
Interest paid
- Net new borrowing
Cash flow to creditors
196
1,021
1,217
AHMAD CORPORATION
2002 Cash Flow to Stockholders
Dividends paid
250
- Net new equity raised
1,077
Cash flow to stockholders
827
As a check, notice that cash flow from assets (SR 390) does equal cash flow to
creditors plus cash flow to stockholders (SR 1,217 - 827 = SR390).
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Q.2. (i) Draw up an income statement and balance sheet for Abdullah
Company for 2001 and 2002. (Assume the tax rate is 34 percent)
(ii) Calculate Cash Flow for 2002 calculate the cash flow from assets, cash flow
to creditors, and cash flow to stockholders.
2001
2002
Sales
2,870
3,080
Depreciation
413
413
Cost of goods sold
987
1,121
Other expenses
238
196
Interest
192
221
Cash
1,505
1,539
Accounts receivable
1,992
2,244
Short-term notes payable
291
273
Long-term debt
5,040
5,880
Net fixed assets
12,621
12,922
Accounts payable
1,581
1,533
Inventory
3,542
3,640
Dividends
350
385
4