Chapter 2, Problem 26QP

Use the following information for Taco Swell, Inc., for Problems 25 and 26 (assume the tax rate is 34 percent):

	2014	2015
Sales	$12,730	$ 14,229
Depreciation	1,827	1,910
Cost of goods sold	4,377	5,178
Other expenses	1,041	906
Interest	854	1,019
Cash	6,674	7,113
Accounts receivable	8,837	10,371
Short-term notes payable	1,288	1,262
Long-term debt	22,352	27,099
Net fixed assets	55,977	59,700
Accounts payable	4,822	5,108
Inventory	15,711	16,817
Dividends	1,522	1,780

26. Calculating Cash Flow [LO4] For 2015, calculate the cash flow from assets, cash flow to creditors, and cash flow to stockholders.

Summary Introduction

To calculate: The cash flow from assets, the cash flow to creditors, and the cash flow to stockholders for the year 2015.

Introduction:

The cash flow refers to the difference between the money that comes in and goes out of the firm. The cash flow from assets refers to the difference between the revenues from the sale of assets and the money invested in purchasing the assets.

The cash flow to the creditors refers to the interest paid to the creditors minus the net fresh debt borrowed by the company. The cash flow to the stockholders refers to the dividend paid to the shareholders of the company minus the fresh equity raised by the company.

Answer to Problem 26QP

The cash flow from assets for the year 2015 is ($2,080.44). The cash flow to creditors for the year 2015 is ($3,728). The cash flow to stockholders’ for the year 2015 is $1,647.56.

Explanation of Solution

Given information:

Company T
Particulars	2014	2015
Sales	$12,730	$14,229
Cost of goods sold	$4,377	$5,178
Other expenses	$1,041	$906
Depreciation	$1,827	$1,910
Interest	$854	$1,019
Dividends	$1,522	$1,780
Cash	$6,674	$7,113
Accounts receivable	$8,837	$10,371
Inventory	$15,711	$16,817
Net fixed assets	$55,977	$59,700
Accounts payable	$4,822	$5,108
Short-term notes payable	$1,288	$1,262
Long-term debt	$22,352	$27,099

Income statement for the year 2014 and 2015 based on the given information:

Company T
Income statement
Particulars	2014		2015
Net sales		$12,730.00		$14,229.00
Less:
Costs	$4,377.00		$5,178.00
Other expenses	$1,041.00		$906.00
Depreciation	$1,827.00	$7,245.00	$1,910.00	$7,994.00
Earnings before interest and taxes		$5,485.00		$6,235.00
Less: Interest paid		$854.00		$1,019.00
Taxable income		$4,631.00		$5,216.00
Less: Taxes ($4,631×34%)		$1,574.54		$1,773.44
Net income (A)		$3,056.46		$3,442.56
Dividends (B)		$1,522.00		$1,780.00
Addition to retained earnings (A)−(B)		$1,534.46		$1,662.56

Balance sheets for the year 2014 and 2015 based on the given information:

Prepare the balance sheet for 2014:

Company T
Balance sheet
For the year 2014
Assets	Amount	Liabilities	Amount
Current assets:		Current liabilities:
Cash	$6,674.00	Accounts payable	$4,822.00
Accounts receivable	$8,837.00	Short-term notes payable	$1,288.00
Inventory	$15,711.00	Total	$6,110.00
Total (A)	$31,222.00
		Long-term debt	$22,352.00
Tangible net fixed assets (B)	$55,977.00	Shareholders' equity:
		Common stock (Balance)	$57,202.54
		Retained earnings	$1,534.46
		Total	$58,737.00
Total assets (A)+(B)	$87,199.00	Total liabilities and shareholders' equity	$87,199.00

Hence, the total assets of Company T is 2014 is $87,199.

Compute the common stock for 2014:

$\begin{array}{c}\text{Common stock}=\left(\begin{array}{l}\text{Total liabilities and}\\ \text{shareholders' equity}\end{array}\right)-\left(\begin{array}{l}\text{Current}\\ \text{liabilities}\end{array}\right)-\left(\begin{array}{l}\text{Long-term}\\ \text{debt}\end{array}\right)-\left(\begin{array}{l}\text{retained}\\ \text{earnings}\end{array}\right)\\ =\$87,199-\$6,110-\$22,352-\$1,534.46\\ =\$57,202.54\end{array}$

Hence, the common stock of Company T for 2014 is $57,202.54.

Prepare the balance sheet for 2015:

Company T
Balance sheet
For the year 2015
Assets	Amount	Liabilities	Amount
Current assets:		Current liabilities:
Cash	$7,113.00	Accounts payable	$5,108.00
Accounts receivable	$10,371.00	Short-term notes payable	$1,262.00
Inventory	$16,817.00	Total	$6,370.00
Total (A)	$34,301.00
		Long-term debt	$27,099.00
Tangible net fixed assets (B)	$59,700.00	Shareholders' equity:
		Common stock (Balance)	$57,334.98
		Retained earnings	$3,197.02
		Total	$60,532.00
Total assets (A)+(B)	$94,001.00	Total liabilities and shareholders' equity	$94,001.00

Hence, the total assets of Company T is 2015 is $94,001.

Compute the retained earnings for 2015:

$\begin{array}{c}\begin{array}{l}\text{Retained earnings}\\ \text{in 2015}\end{array}\}=\text{Retained earnings in 2014}+\text{Addition to retained earnings}\\ =\$1,534.46+\$1,662.56\\ =\$3,197.02\end{array}$

Hence, the retained earnings of Company T for 2015 are $3,197.02.

Compute the common stock for 2015:

$\begin{array}{c}\text{Common stock}=\left(\begin{array}{l}\text{Total liabilities and}\\ \text{shareholders' equity}\end{array}\right)-\left(\begin{array}{l}\text{Current}\\ \text{liabilities}\end{array}\right)-\left(\begin{array}{l}\text{Long-term}\\ \text{debt}\end{array}\right)-\left(\begin{array}{l}\text{retained}\\ \text{earnings}\end{array}\right)\\ =\$94,001-\$6,370-\$27,099-\$3,197.02\\ =\$57,334.98\end{array}$

Hence, the common stock of Company T for 2014 is $57,334.98.

Formulae:

The formula to calculate the net new borrowing and the cash flow to creditors:

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

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

The formula to calculate the new equity raised and the cash flow to stockholders:

$\text{Net new equity raised}=\text{Common equity at the end}-\text{Common equity at the beginning}$

$\text{Cash flow to stockholders'}=\text{Dividends paid}-\text{Net new equity raised}$

The formula to calculate the cash flow from assets:

$\text{Cash flow from assets}=\text{Cash flow to creditors}+\text{Cash flow to stockholders'}$

Compute the net new borrowing at the end of 2015:

The long-term debt in the balance sheet of Company T in 2014 was $22,352. The company had long-term debt worth $27,099 in 2015.

$\begin{array}{c}\text{Net new borrowing}=\text{Long-term debt in 2015}-\text{Long-term debt in 2014}\\ =\$27,099-\$22,352\\ =\$4,747\end{array}$

Hence, the net new borrowing is $4,747.

Compute the cash flow to creditors in 2015:

The interest expense of Company T in 2015 was $1,019.

$\begin{array}{c}\text{Cash flow to creditors}=\text{Interest paid}-\text{Net new borrowing}\\ =\$1,019-\$4,747\\ =\left(\$3,728\right)\end{array}$

Hence, the cash flow to creditors is ($3,728).

Compute the net new equity raised in 2015:

The common equity in 2014 is 57,202.54 (Refer to the balance sheet of 2014 in the solution) and the common equity in 2015 is $57,334.98 (Refer to the balance sheet of 2015 in the solution).

$\begin{array}{c}\text{Net new equity raised}=\text{Common equity at the end}-\text{Common equity at the beginning}\\ =\$57,334.98-\$57,202.54\\ =\$132.44\end{array}$

Hence, the net new equity raised is $132.44.

Compute the cash flow to stockholders’ in 2015:

The company paid $1,780 as dividends in the year 2015.

$\begin{array}{c}\text{Cash flow to stockholders'}=\text{Dividends paid}-\text{Net new equity raised}\\ =\$1,780-\$132.44\\ =\$1,647.56\end{array}$

Hence, the cash flow to stockholders’ is $1,647.56.

Compute the cash flow from assets:

$\begin{array}{c}\text{Cash flow from assets}=\text{Cash flow to creditors}+\text{Cash flow to stockholders'}\\ =(\$3,728)+\$1,647.56\\ =\left(\$2,080.44\right)\end{array}$

Hence, the cash flow from assets is ($2,080.44).