Chapter 2, Problem 21QP

a)

Summary Introduction

To calculate: The shareholders’ equity for the year 2014 and 2015.

Introduction:

The owner’s equity refers to the amount of total assets minus total liabilities. It represents the money invested into the business minus the amount of drawings plus the net income from the point of incorporation.

Answer to Problem 21QP

The owner’s equity for the year 2014 and 2015 are $2,567 and $3,122.

Explanation of Solution

Given information:

The assets and liabilities of Enterprise W for the year 2015 are as follows; current assets of $1,176, net fixed assets of $5,104, current liabilities of $445, long term debt of $2,713.

The assets and liabilities of Enterprise W for the year 2014 are as follows; current assets of $964, net fixed assets of $4,384, current liabilities of $401, long term debt of $2,380.

Formulae:

The formula to calculate the total assets:

$\text{Total assets}=\text{Current assets}+\text{Net fixed assets}$

The formula to calculate the total liabilities:

$\text{Total liabilities}=\text{Current liabilities}+\text{Long term debt}$

The formula to calculate the stockholders equity:

$\text{Stockholders equity}=\text{Total assets}-\text{Total liabilities}$

Compute the total assets for the year 2014:

$\begin{array}{c}\text{Total assets}=\text{Current assets}+\text{Net fixed assets}\\ =\text{\$964}+\text{\$4,384}\\ =\$5,348\end{array}$

Hence, the total assets for the year are $5,348.

Compute the total liabilities for the year 2014:

$\begin{array}{c}\text{Total liabilities}=\text{Current liabilities}+\text{Long term debt}\\ =\text{\$401}+\text{\$2,380}\\ =\$2,781\end{array}$

Hence, the total liabilities for the year 2014 are $2,781.

Compute the stockholders’ equity for the 2014:

$\begin{array}{c}\text{Stockholders equity}=\text{Total assets}-\text{Total liabilities}\\ =\text{\$5,348}-\text{\$2,781}\\ =\text{\$2,567}\end{array}$

Hence, the stockholders equity for the year 2014 is $2,567.

Compute the total assets for the year 2015:

$\begin{array}{c}\text{Total assets}=\text{Current assets}+\text{Net fixed assets}\\ =\text{\$1,176}+\text{\$5,104}\\ =\text{\$6,280}\end{array}$

Hence, the total assets for the year 2015 are$6,280.

Compute the total liabilities for the year 2015:

$\begin{array}{c}\text{Total liabilities}=\text{Current liabilities}+\text{Long term debt}\\ =\text{\$445}+\text{\$2,713}\\ =\text{\$3,158}\end{array}$

Hence, the total liabilities for the year 2015 are $3,158.

Compute the stockholders’ equity for the year 2015:

$\begin{array}{c}\text{Stockholders equity}=\text{Total assets}-\text{Total liabilities}\\ =\text{\$6,280}-\text{\$3,158}\\ =\text{\$3,122}\end{array}$

Hence, the stockholders’ equity for the year is $3,122.

b)

Summary Introduction

To calculate: The change in net working capital for the year 2015.

Introduction:

Net working capital refers to the difference of current assets and current liabilities. Net working capital indicates the short term liquidity of the business.

Answer to Problem 21QP

The change in net working capital for the year 2015 is $168.

Explanation of Solution

Given information:

The assets and liabilities of Enterprise W for the year 2015 are current assets of $1,176, net fixed assets of $5,104, current liabilities of $445, long term debt of $2,713.

The assets and liabilities of Enterprise W for the year 2014 are as follows; current assets of $964, net fixed assets of $4,384, current liabilities of $401, long term debt of $2,380.

Formulae:

The formula to calculate the ending net working capital:

$\text{Ending net working capital}=\text{Ending current assets}-\text{Ending current liabilities}$

The formula to calculate the beginning net working capital:

$\text{Beginning net working capital}=\text{Beginning current assets}-\text{Beginning current liabilities}$

The formula to calculate the changes in net working capital:

$\text{Change in net working capital}=\left(\begin{array}{l}\text{Ending net working capital}\\ -\text{Beginning net working capital}\end{array}\right)$

Compute the ending net working capital:

$\begin{array}{c}\text{Ending net working capital}=\text{Ending current assets}-\text{Ending current liabilities}\\ =\text{\$1,176}-\text{\$445}\\ =\text{\$731}\end{array}$

Hence, the ending net working capital is $731.

Compute the beginning net working capital:

$\begin{array}{c}\text{Beginning net working capital}=\text{Beginning current assets}-\text{Beginning current liabilities}\\ =\text{\$964}-\text{\$401}\\ =\text{\$563}\end{array}$

Hence, the beginning net working capital is $563.

Compute the change in net working capital:

$\begin{array}{c}\text{Change in net working capital}=\left(\begin{array}{l}\text{Ending net working capital}\\ -\text{Beginning net working capital}\end{array}\right)\\ =\$731-\$563\\ =\$168\end{array}$

Hence, the change in net working capital is $168.

c)

Summary Introduction

To calculate: The cash flow from assets for 2016, and the fixed assets sold in 2016.

Answer to Problem 21QP

The cash flow from assets is $3,814. The company sold $440 worth of fixed assets.

Explanation of Solution

Given information:

The net income of Company W has following items of sales $14,740, costs of $5,932, depreciation of $1,190, and interest paid of $328. The tax rate is 40%. The changes in net working capital are $168. The net fixed assets are $5,104 for the year 2015 and net fixed assets for the year 2016 is $4,384. The company purchased fixed assets of $2,350.

The formula to calculate the net capital spending:

$\text{Net capital spending}=\text{Fixed assets bought}-\text{Fixed assets sold}$

The formula to calculate the cash flow from assets:

$\text{Cash flow from assets}=\left(\begin{array}{l}\text{Operating}\\ \text{cash flow}\end{array}\right)-\left(\begin{array}{l}\text{Change in net}\\ \text{working capital}\end{array}\right)-\left(\begin{array}{l}\text{Net capital}\\ \text{spending}\end{array}\right)$

Compute the net income:

Income statement
Particulars	Amount	Amount
Net sales		$14,740
Less:
Costs	$5,932
Depreciation	$1,190	$7,122
Earnings before interest and taxes		$7,618
Less: Interest paid		$328
Taxable income		$7,290
Less: Taxes ($7290×40%)		$2,916
Net income		$4,374

Hence, the net income is $4,374.

Compute the operating cash flow:

Operating cash flow
Particulars	Amount
Earnings before interest and taxes	$7,618
Add: Depreciation	$1,190
	$8,808
Less: Taxes	$2,916
Operating cash flow	$5,892

Hence, the operating cash flow is $5,892.

Compute the net capital spending:

Net capital spending
Particulars	Amount
Ending net fixed assets	$5,104
Less: Beginning net fixed assets	$4,384
	$720
Add: Depreciation	$1,190
Net capital spending	$1,910

Hence, the net capital spending is $1,910.

Compute the cash flow from assets:

The operating cash flow is $5,892. The change in net working capital is $168 and the net capital spending is $1,910.

$\begin{array}{c}\text{Cash flow from assets}=\left(\begin{array}{l}\text{Operating}\\ \text{cash flow}\end{array}\right)-\left(\begin{array}{l}\text{Change in net}\\ \text{working capital}\end{array}\right)-\left(\begin{array}{l}\text{Net capital}\\ \text{spending}\end{array}\right)\\ =\$5,892-\$168-\$1,910\\ =\$3,814\end{array}$

Hence, the cash flow from assets is $3,814.

Compute the fixed assets sold:

$\begin{array}{c}\text{Net capital spending}=\text{Fixed assets bought}-\text{Fixed assets sold}\\ \$1,910=\$2,350-\text{Fixed assets sold}\\ =\$2,350-1,910\\ \text{Fixed assets sold}=\$440\end{array}$

Hence, the value of fixed assets sold is $440.

d)

Summary Introduction

To calculate: The cash flow to creditors and the amount of long-term debt paid off.

Answer to Problem 21QP

The cash flow to creditors is −$5. The company paid off $122 worth of long-term debt.

Explanation of Solution

Given information:

The ending long term debt is $2,713 and the beginning long term debt is $2,380. The interest expenses are $328. The company raised $455 in new long term debt.

The formula to calculate the net new borrowings:

$\text{Net new borrowing}=\text{Long-term debt at the end}-\text{Long-term debt at the beginning}$

Or

$\text{Net new borrowing}=\text{Debt raised}-\text{Debt paid off}$

The formula to calculate the cash flow to creditors:

$\text{Cash flow to creditors}=\text{Interest paid}-\text{Net new borrowing}$

Compute the net new borrowing:

$\begin{array}{c}\text{Net new borrowing}=\text{Long-term debt at the end}-\text{Long-term debt at the beginning}\\ =\$2,713-\$2,380\\ =\$333\end{array}$

Hence, the net new borrowing is $333.

Compute the cash flow to creditors:

$\begin{array}{c}\text{Cash flow to creditors}=\text{Interest paid}-\text{Net new borrowing}\\ =\$328-\$333\\ =-\$5\end{array}$

Hence, the cash flow to creditors is −$5.

Compute the debt paid off:

$\begin{array}{c}\text{Net new borrowing}=\text{Debt raised}-\text{Debt paid off}\\ \text{\$333}=\text{\$455}-\text{Debt paid off}\\ \text{Debt paid off}=\$122\end{array}$

Hence, the value of debt paid off is $122.