Chapter 2, Problem 22QP

a)

Summary Introduction

To calculate: The shareholders’ equity for the years 2013 and 2014.

Introduction:

Cash flow refers to the difference between the cash that comes into the business and the cash that goes out of the business. The following are the different types of cash flows in a corporation:

Cash flow from assets:

It refers to the difference between the revenues from the sale of assets and the money invested in purchasing the assets.

Cash flow to the creditors:

It refers to the interest paid to the creditors minus the net fresh debt borrowed by the company.

Cash flow to the stockholders:

It refers to the dividend paid to the shareholders of the company minus the fresh equity raised by the company.

Operating cash flow:

It is the cash flow from the operating activities of the firm.

Answer to Problem 22QP

The stockholders’ equity for the year 2013is $8,557. The stockholders’ equity for the year 2014 is $7,425.

Explanation of Solution

Given information:

Refer Question and Problem 22 for the balance sheet and income statement.

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 stock holders’ equity:

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

Compute the total assets for the year 2013:

$\begin{array}{c}\text{Total assets}=\text{Current assets}+\text{Net fixed assets}\\ =\$3,198+\$14,826\\ =\$18,024\end{array}$

Hence, the total assets for the year 2013 are $18,024.

Compute the total liabilities for the year 2013:

$\begin{array}{c}\text{Total liabilities}=\text{Current liabilities}+\text{Long term debt}\\ =\text{\$1,381+\$8,086}\\ =\$9,467\end{array}$

Hence, the total liabilities for the year 2013 are $9,467.

Compute the stockholders’ equity for 2013:

$\begin{array}{c}\text{Stockholders equity}=\text{Total assets}-\text{Total liabilities}\\ =\$18,024-\$9,467\\ =\$8,557\end{array}$

Hence, the stockholders’ equity for the year 2013 is $8,557.

Compute the total assets for 2014:

$\begin{array}{c}\text{Total assets}=\text{Current assets}+\text{Net fixed assets}\\ =\$3,389+\$15,500\\ =\$18,889\end{array}$

Hence, the total assets for the year are $18,889.

Compute the total liabilities for 2014:

$\begin{array}{c}\text{Total liabilities}=\text{Current liabilities}+\text{Long term debt}\\ =\$2,030+\$9,434\\ =\$11,464\end{array}$

Hence, the total liabilities for the year 2014 are $11,464.

Compute the stockholders’ equity for 2014:

$\begin{array}{c}\text{Stockholders equity}=\text{Total assets}-\text{Total liabilities}\\ =\$18,889-\$11,464\\ =\$7,425\end{array}$

Hence, the stockholders’ equity for the year 2014 is $7,425.

b)

Summary Introduction

To calculate: The change in net working capital for the year 2014.

Answer to Problem 22QP

The change in net working capital for 2014 is −$458.

Explanation of Solution

Given information:

Refer Question and Problem 22 for the balance sheet and income statement.

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:

$\begin{array}{c}\text{Ending net working capital}=\text{Ending current assets}-\text{Ending current liabilities}\\ =\$3,389-\$2,030\\ =\$1,359\end{array}$

Hence, the ending net working capital is $1,359.

Compute the beginning net working capital:

$\begin{array}{c}\text{Beginning net working capital}=\text{Beginning current assets}-\text{Beginning current liabilities}\\ =\$3,198-\$1,381\\ =\$1,817\end{array}$

Hence, the beginning net working capital is $1,817.

Compute the change in net working capital:

$\begin{array}{c}\text{Change in net working capital}=\left(\begin{array}{l}\text{Ending net working capital}-\\ \text{Beginning net working capital}\end{array}\right)\\ =\$1,359-\$1,817\\ =-\$458\end{array}$

Hence, the change in net working capital is −$458.

c)

Summary Introduction

To calculate: The cash flow from assets for 2014, and the fixed assets sold in 2014.

Answer to Problem 22QP

The cash flow from assets is $11,970. The company sold $3,710 worth of fixed assets.

Explanation of Solution

Given information:

Refer Question and Problem 22 income statement. The change in net working capital is−$458. The net fixed assets are $14,826 for the year 2013 and $15,500 for the year 2014. The company purchased $8,424 new fixed assets and taxed at the rate of 40%.

Formulae:

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		$47,842
Less:
Costs	$23,992
Depreciation	$4,040	$28,032
Earnings before interest and taxes		$19,810
Less: Interest paid		$750
Taxable income		$19,060
Less: Taxes ($19,060×40%)		$7,624
Net income		$11,436

Hence, the net income is $11,436.

Compute the operating cash flow:

Operating cash flow
Particulars	Amount
Earnings before interest and taxes	$19,810
Add: Depreciation	$4,040
	$23,850
Less: Taxes	$7,624
Operating cash flow	$16,226

Hence, the operating cash flow is $16,226.

Compute the net capital spending:

Net capital spending
Particulars	Amount
Ending net fixed assets	$15,500
Less: Beginning net fixed assets	$14,826
	$674
Add: Depreciation	$4,040
Net capital spending	$4,714

Hence, the net capital spending is $4,714.

Compute the cash flow from assets:

The change in net working capital is −$458.

$\begin{array}{c}\text{Cash flow from assets}=\left(\begin{array}{l}\text{Operating}\\ \text{cash flow}\end{array}\right)-\left(\begin{array}{l}\text{Change in net}\\ \text{working capital}\end{array}\right)-\left(\begin{array}{l}\text{Net capital}\\ \text{spending}\end{array}\right)\\ =\$16,226-\left(458\right)-\$4,714\\ =\$11,970\end{array}$

Hence, the cash flow from assets is $11,970.

Compute the fixed assets sold:

$\begin{array}{c}\text{Net capital spending}=\text{Fixed assets bought}-\text{Fixed assets sold}\\ \$4,714=\$8,424-\text{Fixed assets sold}\\ =\$3,710\end{array}$

Hence, the value of fixed assets sold is $3,710.

d)

Summary Introduction

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

Answer to Problem 22QP

The cash flow to creditors is −$598. The company paid off $1,187 worth of long-term debt.

Explanation of Solution

Given information:

The long-term debt is $8,086 for the year 2013 and $9,434 for the year 2014. The company raised $2,535 as a new long term debt. Refer Question and Problem 22 for the balance sheet and income statement.

Formulae:

The formula to calculate the net new borrowings:

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

The formula to calculate the cash flow to creditors:

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

The formula to calculate the debt paid off:

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

Compute the net new borrowing:

$\begin{array}{c}\text{Net new borrowing}=\text{Long-term debt at the end}-\text{Long-term debt at the beginning}\\ =\$9,434-\$8,086\\ =\$1,348\end{array}$

Hence, the net new borrowing is $1,348.

Compute the cash flow to creditors:

$\begin{array}{c}\text{Cash flow to creditors}=\text{Interest paid}-\text{Net new borrowing}\\ =\$750-\$1,348\\ =-\$598\end{array}$

Hence, the cash flow to creditors is −$598.

Compute the debt paid off:

$\begin{array}{c}\text{Net new borrowing}=\text{Debt raised}-\text{Debt paid off}\\ \$1,348=\$2,535-\text{Debt paid off}\\ \text{Debt paid off}=\text{\$1,187}\end{array}$

Hence, the value of debt paid off is $1,187.