Chapter 2, Problem 22QP

a)

Summary Introduction

To calculate: The shareholders’ equity for 2016 and 2015.

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

• Cash flow to creditors:

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

• Cash flow to 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 refers to the cash flow from operating activities of the firm.

Answer to Problem 22QP

The stockholders’ equity for 2015 is $7,273. The stockholders’ equity for 2016 is $6,311.

Explanation of Solution

Given information:

The current assets are $2,718, the net fixed assets are $12,602, the current liabilities are $1,174, and the long-term debt is $6,873 for the year 2015. The current assets are $2,881, the net fixed assets are $13,175, the current liabilities are $1,726, and the long-term debt is $8,019 for the year 2016.

Formulae:

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

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

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

Compute the total assets for 2015:

$\begin{array}{c}\text{Total assets}=\text{Current assets}-\text{Net fixed assets}\\ =\$2,718+\$12,602\\ =\$15,320\end{array}$

Hence, the total assets for 2015 is $15,320.

Compute the total liabilities for 2015:

$\begin{array}{c}\text{Total liabilities}=\text{Current liabilities}-\text{Long term debt}\\ =\$1,174+\$6,873\\ =\$8,047\end{array}$

Hence, the total liabilities for 2015 is $8,047.

Compute the stockholders’ equity for 2015:

$\begin{array}{c}\text{Stockholders equity}=\text{Total assets}-\text{Total liabilities}\\ =\$15,320-\$8,047\\ =\$7,273\end{array}$

Hence, the stockholders’ equity for 2015 is $7,273.

Compute the total assets for 2016:

$\begin{array}{c}\text{Total assets}=\text{Current assets}-\text{Net fixed assets}\\ =\$2,881+\$13,175\\ =\$16,056\end{array}$

Hence, the total assets for 2016 is $16,056.

Compute the total liabilities for 2016:

$\begin{array}{c}\text{Total liabilities}=\text{Current liabilities}-\text{Long term debt}\\ =\$1,726+\$8,019\\ =\$9,745\end{array}$

Hence, the total liabilities for 2016 is $9,745.

Compute the stockholders’ equity for 2016:

$\begin{array}{c}\text{Stockholders equity}=\text{Total assets}-\text{Total liabilities}\\ =\$16,056-\$9,745\\ =\$6,311\end{array}$

Hence, the stockholders’ equity for 2016 is $6,311.

b)

Summary Introduction

To calculate: The change in net working capital for 2016.

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

• Cash flow to creditors:

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

• Cash flow to 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 refers to the cash flow from operating activities of the firm.

Answer to Problem 22QP

The change in net working capital for 2016 is ($389).

Explanation of Solution

Given information:

The current assets are $2,718 and the current liabilities are $1,174for the year 2015. The current assets are $2,881 and the current liabilities are $1,726 for the year 2016.

Formulae:

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

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

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

Compute the ending net working capital:

$\begin{array}{c}\text{Ending net working capital}=\text{Ending current assets}-\text{Ending current liabilities}\\ =\$2,881-\$1,726\\ =\$1,155\end{array}$

Hence, the ending net working capital is $1,155.

Compute the beginning net working capital:

$\begin{array}{c}\text{Beginning net working capital}=\text{Beginning current assets}-\text{Beginning current liabilities}\\ =\$2,718-\$1,174\\ =\$1,544\end{array}$

Hence, the beginning net working capital is $1,544.

Compute the change in net working capital:

$\begin{array}{c}\text{Change in net working capital}=\left(\begin{array}{l}\text{Ending net working capital}-\\ \text{Beginning net working capital}\end{array}\right)\\ =\$1,155-\$1,544\\ =\left(\$389\right)\end{array}$

Hence, the change in net working capital is ($389).

c)

Summary Introduction

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

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

• Cash flow to creditors:

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

• Cash flow to 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 refers to the cash flow from operating activities of the firm.

Answer to Problem 22QP

The cash flow from assets is $10,239. The company sold $3,153 worth of fixed assets.

Explanation of Solution

Given information:

The company had sales of $40,664. The costs of goods sold were $20,393. The company charged $3,434 as depreciation. It had to pay interest expenses amounting to $938. The tax rate applicable is 40 percent. The change in net working capital is ($389). The net fixed assets are $12,602 for the year 2015, and the net fixed assets are $13,175 for the year 2016. The company purchased $7,160 worth of fixed assets.

Formulae:

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

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

Compute the net income:

Company P
Income statement
Particulars	Amount	Amount
Net sales		$40,664
Less:
Costs	$20,393
Depreciation	$3,434	$23,827
Earnings before interest and taxes		$16,837
Less: Interest paid		$938
Taxable income		$15,899
Less: Taxes ($15,899×40%)		$6,360
Net income		$9,539

Hence, the net income is $9,539.

Compute the operating cash flow:

Company Q
Operating cash flow
Particulars	Amount
Earnings before interest and taxes	$16,837
Add: Depreciation	$3,434
	$20,271
Less: Taxes	$6,360
Operating cash flow	$13,911

Hence, the operating cash flow is $13,911.

Compute the net capital spending:

Company Q
Net capital spending
Particulars	Amount
Ending net fixed assets	$13,175
Less: Beginning net fixed assets	$12,602
	$573
Add: Depreciation	$3,434
Net capital spending	$4,007

Hence, the net capital spending is $4,007.

Compute the cash flow from assets:

The operating cash flow is $13,911. The change in net working capital is ($389), and the net capital spending is $4,007.

$\begin{array}{c}\text{Cash flow from assets}=\left(\begin{array}{l}\text{Operating}\\ \text{cash flow}\end{array}\right)-\left(\begin{array}{l}\text{Change in net}\\ \text{working capital}\end{array}\right)-\left(\begin{array}{l}\text{Net capital}\\ \text{spending}\end{array}\right)\\ =\$13,911–\left(\$389\right)–\$4,007\\ =\$10,293\end{array}$

Hence, the cash flow from assets is $10,293.

Compute the fixed assets sold:

$\begin{array}{c}\text{Net capital spending}=\text{Fixed assets bought}-\text{Fixed assets sold}\\ \$4,007=\$7,160-\text{Fixed assets sold}\\ \text{Fixed assets sold}=\$7,160-\$4,007\\ =\$3,153\end{array}$

Hence, the value of fixed assets sold is $3,153.

d)

Summary Introduction

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

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

• Cash flow to creditors:

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

• Cash flow to 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 refers to the cash flow from operating activities of the firm.

Answer to Problem 22QP

The cash flow to creditors is ($208). The company paid off $1,009 worth of long-term debt.

Explanation of Solution

Given information:

The long-term debt is $6,873 for the year 2015, and the long-term debt is $8,019 for the year 2016. The raised $2,155 in new long-term debt. The company paid interest amounting to $938.

Formulae:

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

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

Compute the net new borrowing:

$\begin{array}{c}\text{Net new borrowing}=\text{Long-term debt at the end}-\text{Long-term debt at the beginning}\\ =\$8,019–\$6,873\\ \text{= }\$1,146\end{array}$

Hence, the net new borrowing is $1,146.

Compute the cash flow to creditors:

$\begin{array}{c}\text{Cash flow to creditors}=\text{Interest paid}-\text{Net new borrowing}\\ =\$938–\$1,146\\ \text{= }\left(\$208\right)\end{array}$

Hence, the cash flow to creditors is ($208).

Compute the debt paid off:

$\begin{array}{c}\text{Net new borrowing}=\text{Debt raised}-\text{Debt paid off}\\ \$1,146=\$2,155–\text{Debt paid off}\\ \text{Debt paid off}=\$2,155-\$1,146\\ =\$1,009\end{array}$

Hence, the value of debt paid off is $1,009.