
1)
Case summary:
Company SB manufactures surf boards. It was founded by Person T. Initially, the company was funded by his own family, and hence, there were no detailed financial statements maintained by the company. Presently, the company plans to expand its business by raising equity and debt.
The company hires a financial analyst named Person PW, to evaluate the company’s performance. Person PW collects the following information about the company:
Particulars | 2013 | 2014 |
Sales | $333,426 | $406,427 |
Cost of goods sold | $169,969 | $214,607 |
Selling and administrative expenses | $33,425 | $43,626 |
$47,980 | $54,230 | |
Interest | $10,442 | $11,954 |
Cash | $24,524 | $26,056 |
Accounts receivable | $17,378 | $22,542 |
Inventory | $36,570 | $50,185 |
Net fixed assets | $211,680 | $264,021 |
Accounts payable | $43,344 | $48,090 |
Short-term notes payable | $19,757 | $21,571 |
Long-term debt | $106,848 | $119,976 |
New equity | $0 | $20,160 |
Characters in the case:
- Company SB
- Person T: Owner of Company SB
- Person PW: Financial analyst
To prepare: The income statement of Company SB for the years 2013 and 2014.
Introduction:
The income statement indicates the performance of an organization for a short period. In other words, the income statement helps to determine the income of an organization for a given accounting period.
1)

Answer to Problem 1CC
The net income for 2013 and 2014 is $57,288 and $65,608.
Explanation of Solution
Given information:
The tax rate of Company S is 20 percent. The company pays out 50 percent of the net income as dividend.
Prepare the income statement for 2013:
Income statement for the year 2013 | ||
Particulars | Amount | Amount |
Net sales | $333,426.00 | |
Less: | ||
Costs | $169,969.00 | |
Selling and administrative expenses | $33,425.00 | |
Depreciation | $47,980.00 | $251,374.00 |
Earnings before interest and taxes | $82,052.00 | |
Less: Interest paid | $10,442.00 | |
Taxable income | $71,610.00 | |
Less: Taxes ($71,610×20%) | $14,322.00 | |
Net income (A) | $57,288.00 | |
Dividends (B) = (A)×50% | $28,644.00 | |
Addition to | $28,644.00 |
Hence, the net income for 2013 is $57,288.
Prepare the income statement for 2014
Income statement for the year 2014 | ||
Particulars | Amount | Amount |
Net sales | $406,427.00 | |
Less: | ||
Costs | $214,607.00 | |
Selling and administrative expenses | $43,626.00 | |
Depreciation | $54,230.00 | $312,463.00 |
Earnings before interest and taxes | $93,964.00 | |
Less: Interest paid | $11,954.00 | |
Taxable income | $82,010.00 | |
Less: Taxes ($82,010×20%) | $16,402.00 | |
Net income (A) | $65,608.00 | |
Dividends (B) = (A)×50% | $32,804.00 | |
Addition to retained earnings (A)−(B) | $32,804.00 |
Hence, the net income for 2014 is $65,608.
2)
To prepare: The
Introduction:
The balance sheet refers to the statement that indicates the financial position of the firm.
2)

Explanation of Solution
Prepare the balance sheet for 2013:
Balance sheet | |||
For the year 2013 | |||
Assets | Amount | Liabilities | Amount |
Current assets | Current liabilities | ||
Cash | $24,524 | Accounts payable | $48,090 |
Accounts receivable | $17,378 | Short-term notes payable | $21,571 |
Inventory | $36,570 | Total | $69,661 |
Total (A) | $78,472 | ||
Long-term debt | $119,976 | ||
Fixed assets | |||
Tangible net fixed assets (B) | $211,680 | Shareholders' equity | |
Common stock (Balancing figure) | $71,871 | ||
Addition to retainedearnings | $28,644 | ||
Total | $100,515 | ||
Total assets (A)+(B) | $290,152 | Total liabilities and shareholders' equity | $290,152 |
Prepare the balance sheet for 2014:
Note: The retained earnings for the year 2014 are the sum of addition to retained earnings of 2013 and the addition to retained earnings of 2014.
Balance sheet | |||
For the year 2014 | |||
Assets | Amount | Liabilities | Amount |
Current assets | Current liabilities | ||
Cash | $26,056 | Accounts payable | $48,090 |
Accounts receivable | $22,542 | Short-term notes payable | $21,571 |
Inventory | $50,185 | Total | $69,661 |
Total (A) | $98,783 | ||
Long-term debt | $119,976 | ||
Fixed assets | |||
Tangible net fixed assets (B) | $264,021 | Shareholders' equity | |
Common stock (Balancing figure) | $111,719 | ||
Addition to retained earnings ($28,644+$32,804) | $61,448 | ||
Total | $173,167 | ||
Total assets (A)+(B) | $362,804 | Total liabilities and shareholders' equity | $362,804 |
3)
To calculate: The operating cash flow for 2013 and 2014
3)

Answer to Problem 1CC
The operating cash flow for 2013 is $116,710. The operating cash flow for 2014 is $131,792.
Explanation of Solution
Given information:
Refer Part1 for the income statement for the years2013 and 2014.
Compute the operating cash flow for 2013:
Operating cash flow for 2013 | |
Particulars | Amount |
Earnings before interest and taxes | $82,052 |
Add: Depreciation | $47,980 |
$130,032 | |
Less: Taxes | $14,322 |
Operating cash flow | $115,710 |
Hence, the operating cash flow is $115,710.
Compute the operating cash flow for 2014:
Operating cash flow for 2014 | |
Particulars | Amount |
Earnings before interest and taxes | $93,964 |
Add: Depreciation | $54,230 |
$148,194 | |
Less: Taxes | $16,402 |
Operating cash flow | $131,792 |
Hence, the operating cash flow is $131,792.
4)
To calculate: The cash flow from assets
4)

Answer to Problem 1CC
The cash flow from assets for 2014 is $4,910.
Explanation of Solution
Formulae:
The formula to calculate the ending net working capital:
The formula to calculate the beginning net working capital:
The formula to calculate the change in net working capital:
The formula to calculate the cash flow from assets:
Compute the net capital spending:
Net capital spending | |
Particulars | Amount |
Ending net fixed assets | $264,021 |
Less: Beginning net fixed assets | $211,680 |
$52,341 | |
Add: Depreciation | $54,230 |
Net capital spending | $106,571 |
Hence, the net capital spending is $106,571.
Compute the ending net working capital:
Hence, the ending net working capital is $29,122.
Compute the beginning net working capital:
Hence, the beginning net working capital is $8,811.
Compute the change in net working capital:
Hence, the change in net working capital is $20,311.
Compute the cash flow from assets:
The operating cash flow is $131,792, the change in net working capital is $16,502 and the net capital spending is $106,571.
Hence, the cash flow from assets is $4,910.
5)
To calculate: The cash flow to creditors
5)

Answer to Problem 1CC
The cash flow to creditors is −$1,174.
Explanation of Solution
Given information:
Company SB has to pay interest expenses amounting to $11,954. The new net borrowings were $13,128
Formula:
Compute the cash flow to creditors:
Hence, the cash flow to creditors is −$1,174.
6)
To calculate: The cash flow to stockholders
6)

Answer to Problem 1CC
The cash flow to stockholders is $12,644.
Explanation of Solution
Given information:
Company S paid dividends amounting to $32,804.00. It issued new equity worth $20,160.
Formula:
Compute the cash flow to the stockholders:
Hence, the cash flow to stockholders is $12,644.
To discuss: The cash flows of the company

Explanation of Solution
The earnings of the company were positive. The cash flow of the company was positive from the operating activities. The company paid $12,644 to the stockholders. The cash flow to creditors is negative. Hence, it raised $1,174from creditors. The investment in net working capital was $20,311. It also invested $106,571 in fixed assets.
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