Chapter 2, Problem 23QP

a)

Summary Introduction

To calculate: The shareholders’ equity for 2017 and 2016.

Explanation of Solution

Compute the total assets for 2016:

$\begin{array}{c}\text{Total assets}=\text{Current assets}-\text{Net fixed assets}\\ =\$1,066+\$5,184\\ =\$6,250\end{array}$

Hence, the total assets for 2016 is $6,250.

Compute the total liabilities for 2016:

$\begin{array}{c}\text{Total liabilities}=\text{Current liabilities}-\text{Long term debt}\\ =\$475+\$2,880\\ =\$3,355\end{array}$

Hence, the total liabilities for 2016 is $3,355.

Compute the stockholders’ equity for 2016:

$\begin{array}{c}\text{Stockholders equity}=\text{Total assets}-\text{Total liabilities}\\ =\$6,250-\$3,355\\ =\$2,895\end{array}$

Hence, the stockholders’ equity for 2016 is $2,895.

Compute the total assets for 2017:

$\begin{array}{c}\text{Total assets}=\text{Current assets}-\text{Net fixed assets}\\ =\$1,145+\$5,472\\ =\$6,617\end{array}$

Hence, the total assets for 2015 is $6,617.

Compute the total liabilities for 2017:

$\begin{array}{c}\text{Total liabilities}=\text{Current liabilities}-\text{Long term debt}\\ =\$518+\$3,090\\ =\$3,608\end{array}$

Hence, the total liabilities for 2017 is $3,608.

Compute the stockholders’ equity for 2017:

$\begin{array}{c}\text{Stockholders equity}=\text{Total assets}-\text{Total liabilities}\\ =\$6,617-\$3,608\\ =\$3,009\end{array}$

Hence, the stockholders’ equity for 2017 is $3,009.

b)

Summary Introduction

To calculate: The change in net working capital for 2017.

Explanation of Solution

Compute the ending net working capital:

$\begin{array}{c}\text{Ending net working capital}=\text{Ending current assets}-\text{Ending current liabilities}\\ =\$1,145-\$518\\ =\$627\end{array}$

Hence, the ending net working capital is $627.

Compute the beginning net working capital:

$\begin{array}{c}\text{Beginning net working capital}=\text{Beginning current assets}-\text{Beginning current liabilities}\\ =\$1,066-\$475\\ =\$591\end{array}$

Hence, the beginning net working capital is $591.

Compute the change in net working capital:

$\begin{array}{c}\text{Change in net working capital}=\left(\begin{array}{l}\text{Ending net working capital}-\\ \text{Beginning net working capital}\end{array}\right)\\ =\$627-\$591\\ =\$36\end{array}$

Hence, the change in net working capital is $36.

c)

Summary Introduction

To calculate: The cash flow from assets for 2017, and the fixed assets sold in 2017.

Explanation of Solution

Compute the net income:

Hence, the net income is $6,532.

Compute the operating cash flow:

Hence, the operating cash flow is $8,434.

Compute the net capital spending:

Hence, the net capital spending is $1,627.

Compute the cash flow from assets:

$\begin{array}{c}\text{Cash flow from assets}=\left(\begin{array}{l}\text{Operating}\\ \text{cash flow}\end{array}\right)-\left(\begin{array}{l}\text{Change in net}\\ \text{working capital}\end{array}\right)-\left(\begin{array}{l}\text{Net capital}\\ \text{spending}\end{array}\right)\\ =\$8,434–\$36–\$1,627\\ =\$6,771\end{array}$

Hence, the cash flow from assets is $6,771.

Compute the fixed assets sold:

$\begin{array}{c}\text{Net capital spending}=\text{Fixed assets bought}-\text{Fixed assets sold}\\ \$1,627=\$2,740-\text{Fixed assets sold}\\ \text{Fixed assets sold}=\$2,740-\$1,627\\ =\$1,113\end{array}$

Hence, the value of fixed assets sold is $1,113.

d)

Summary Introduction

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

Explanation of Solution

Compute the net new borrowing:

$\begin{array}{c}\text{Net new borrowing}=\text{Long-term debt at the end}-\text{Long-term debt at the beginning}\\ =\$3,090–\$2,880\\ \text{= }\$210\end{array}$

Hence, the net new borrowing is $210.

Compute the cash flow to creditors:

$\begin{array}{c}\text{Cash flow to creditors}=\text{Interest paid}-\text{Net new borrowing}\\ =\$562–\$210\\ \text{= }\$352\end{array}$

Hence, the cash flow to creditors is $352.

Compute the debt paid off:

$\begin{array}{c}\text{Net new borrowing}=\text{Debt raised}-\text{Debt paid off}\\ \$210=\$634–\text{Debt paid off}\\ \text{Debt paid off= }\$634-\$210\\ =\$424\end{array}$

Hence, the value of debt paid off is $424.