Answered: ance its operations, has no current…

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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Question

A. Income Statement
At the end of the last year, King Power Company achieved $6 million in income (EBITDA). Depreciation expense was $1.2 million, interest expense was $800,000 and the corporate tax rate was 35%. At the end of the fiscal year the company had current assets totaling $12 million, $4 million in accounts payable, $1.5 million in accrued liabilities, $1.3 million in other payables, and $8 million in property, plant, and equipment. Assume that King Power has no excess cash, uses debt and equity to finance its operations, has no current liabilities, and recognizes depreciation periodically.

Determine the company's net income or loss. Explain how this result can help the manager in making decisions in the company.
2. Calculate net and operating working capital. Explain the difference between the two results.
3. If the company had $6 million in property, plant, and equipment in the previous year and net operating working capital remained constant, what is the company's available cash flow? Explain how the available cash flow result helps managers in the financial planning process.

Expert Solution

Step 1

An income statement is a financial statement that reveals how lucrative a company was during a specific reporting period. It displays revenue after subtracting costs and losses.