UPENN: LOOSE LEAF CORP.FIN W/CONNECT
UPENN: LOOSE LEAF CORP.FIN W/CONNECT
17th Edition
ISBN: 9781260361278
Author: Ross
Publisher: McGraw-Hill Publishing Co.
Question
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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.

a)

Expert Solution
Check Mark

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:

Total assets=Current assets+Net fixed assets

The formula to calculate the total liabilities:

Total liabilities=Current liabilities+Long term debt

The formula to calculate the stockholders equity:

Stockholders equity=Total assetsTotal liabilities

Compute the total assets for the year 2014:

Total assets=Current assets+Net fixed assets=$964+$4,384=$5,348

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

Compute the total liabilities for the year 2014:

Total liabilities=Current liabilities+Long term debt=$401+$2,380=$2,781

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

Compute the stockholders’ equity for the 2014:

Stockholders equity=Total assetsTotal liabilities=$5,348$2,781=$2,567

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

Compute the total assets for the year 2015:

Total assets=Current assets+Net fixed assets=$1,176+$5,104=$6,280

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

Compute the total liabilities for the year 2015:

Total liabilities=Current liabilities+Long term debt=$445+$2,713=$3,158

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

Compute the stockholders’ equity for the year 2015:

Stockholders equity=Total assetsTotal liabilities=$6,280$3,158=$3,122

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.

b)

Expert Solution
Check Mark

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:

Ending net working capital=Ending current assetsEnding current liabilities

The formula to calculate the beginning net working capital:

Beginning net working capital=Beginning current assetsBeginning current liabilities

The formula to calculate the changes in net working capital:

Change in net working capital=(Ending net working capitalBeginning net working capital)

Compute the ending net working capital:

Ending net working capital=Ending current assetsEnding current liabilities=$1,176$445=$731

Hence, the ending net working capital is $731.

Compute the beginning net working capital:

Beginning net working capital=Beginning current assetsBeginning current liabilities=$964$401=$563

Hence, the beginning net working capital is $563.

Compute the change in net working capital:

Change in net working capital=(Ending net working capitalBeginning net working capital)=$731$563=$168

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.

c)

Expert Solution
Check Mark

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:

Net capital spending=Fixed assets boughtFixed assets sold

The formula to calculate the cash flow from assets:

Cash flow from assets=(Operatingcash flow)(Change in networking capital)(Net capitalspending)

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.

Cash flow from assets=(Operatingcash flow)(Change in networking capital)(Net capitalspending)=$5,892$168$1,910=$3,814

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

Compute the fixed assets sold:

Net capital spending=Fixed assets boughtFixed assets sold$1,910=$2,350Fixed assets sold=$2,3501,910Fixed assets sold=$440

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.

d)

Expert Solution
Check Mark

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:

Net new borrowing=Long-term debt at the endLong-term debt at the beginning

Or

Net new borrowing=Debt raisedDebt paid off

The formula to calculate the cash flow to creditors:

Cash flow to creditors=Interest paidNet new borrowing

Compute the net new borrowing:

Net new borrowing=Long-term debt at the endLong-term debt at the beginning=$2,713$2,380=$333

Hence, the net new borrowing is $333.

Compute the cash flow to creditors:

Cash flow to creditors=Interest paidNet new borrowing=$328$333=$5

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

Compute the debt paid off:

Net new borrowing=Debt raisedDebt paid off$333=$455Debt paid offDebt paid off=$122

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

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Chapter 2 Solutions

UPENN: LOOSE LEAF CORP.FIN W/CONNECT

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