
1)
Case summary:
Company SB manufactures surf boards. It was founded by Person T. Initially, the company was funded by his own family, and hence, there were no detailed financial statements maintained by the company. Presently, the company plans to expand its business by raising equity and debt.
The company hires a financial analyst named Person PW to evaluate the company’s performance. Person PW collects the following information about the company:
Particulars | 2013 | 2014 |
Sales | $3,334,260 | $406,427 |
Cost of goods sold | $169,969 | $214,607 |
Selling and administrative expenses | $33,425 | $43,626 |
$47,980 | $54,230 | |
Interest | $10,442 | $11,954 |
Cash | $24,524 | $26,056 |
Accounts receivable | $17,378 | $22,542 |
Inventory | $36,570 | $50,185 |
Net fixed assets | $211,680 | $264,021 |
Accounts payable | $43,344 | $48,090 |
Short-term notes payable | $19,757 | $21,571 |
Long-term debt | $106,848 | $119,976 |
New equity | $0 | $20,160 |
Characters in the case:
- Company SB
- Person T: Owner of Company SB
- Person PW: Financial analyst
To prepare: The income statement of Company SB for the years2013 and 2014.
Introduction:
The income statement indicates the performance of an organization for a short period. In other words, the income statement helps to determine the income of an organization for a given accounting period.
1)

Answer to Problem 2CC
The net income for 2013 and 2014 is $57,288 and $65,608.
Explanation of Solution
Given information:
The tax rate of Company S is 20 percent. The company pays out 50 percent of the net income as dividend.
Prepare the income statement for 2013:
Income statement for the year 2013 | ||
Particulars | Amount | Amount |
Net sales | $333,426.00 | |
Less: | ||
Costs | $169,969.00 | |
Selling and administrative expenses | $33,425.00 | |
Depreciation | $47,980.00 | $251,374.00 |
Earnings before interest and taxes | $82,052.00 | |
Less: Interest paid | $10,442.00 | |
Taxable income | $71,610.00 | |
Less: Taxes ($71,610×20%) | $14,322.00 | |
Net income (A) | $57,288.00 | |
Dividends (B) = (A)×50% | $28,644.00 | |
Addition to | $28,644.00 |
Hence, the net income for 2013 is $57,288.
Prepare the income statement for 2014:
Income statement for the year 2014 | ||
Particulars | Amount | Amount |
Net sales | $406,427.00 | |
Less: | ||
Costs | $214,607.00 | |
Selling and administrative expenses | $43,626.00 | |
Depreciation | $54,230.00 | $312,463.00 |
Earnings before interest and taxes | $93,964.00 | |
Less: Interest paid | $11,954.00 | |
Taxable income | $82,010.00 | |
Less: Taxes ($98,412×34%) | $16,402.00 | |
Net income (A) | $65,608.00 | |
Dividends (B) = (A)×50% | $32,804.00 | |
Addition to retained earnings (A)−(B) | $32,804.00 |
Hence, the net income for 2014 is $65,608.
2)
To prepare: The
Introduction:
The balance sheet refers to the statement that indicates the financial position of the firm.
2)

Explanation of Solution
Prepare the balance sheet for 2013:
Balance sheet | |||
For the year 2013 | |||
Assets | Amount | Liabilities | Amount |
Current assets | Current liabilities | ||
Cash | $24,524 | Accounts payable | $48,090 |
Accounts receivable | $17,378 | Short-term notes payable | $21,571 |
Inventory | $36,570 | Total | $69,661 |
Total (A) | $78,472 | ||
Long-term debt | $119,976 | ||
Fixed assets | |||
Tangible net fixed assets (B) | $211,680 | Shareholders' equity | |
Common stock (Balancing figure) | $71,871 | ||
Addition to retained earnings | $28,644. | ||
Total | $100,515 | ||
Total assets (A)+(B) | $290,152 | Total liabilities and shareholders' equity | $290,152 |
Prepare the balance sheet for 2014:
Note: The retained earnings for the year 2014 are the sum of addition to retained earnings of 2013 and the addition to retained earnings of 2014.
Balance sheet | |||
For the year 2014 | |||
Assets | Amount | Liabilities | Amount |
Current assets | Current liabilities | ||
Cash | $26,056 | Accounts payable | $48,090 |
Accounts receivable | $22,542 | Short-term notes payable | $21,571 |
Inventory | $50,185 | Total | $69,661 |
Total (A) | $98,783 | ||
Long-term debt | $119,976 | ||
Fixed assets | |||
Tangible net fixed assets (B) | $264,021 | Shareholders' equity | |
Common stock (Balancing figure) | $111,719 | ||
Addition to Retained earnings ($28,644+$32,804) | $61,448 | ||
Total | $173,167 | ||
Total assets (A)+(B) | $362,804 | Total liabilities and shareholders' equity | $362,804 |
3)
To calculate: The operating cash flow for 2013 and 2014
3)

Answer to Problem 2CC
The operating cash flow for 2013 is $116,710. The operating cash flow for 2014 is $131,792.
Explanation of Solution
Given information:
Refer Part 1 for income statement items for the years 2013 and 2014.
Compute the operating cash flow for 2013:
Operating cash flow for 2013 | |
Particulars | Amount |
Earnings before interest and taxes | $83,052 |
Add: Depreciation | $47,980 |
$131,032 | |
Less: Taxes | $14,322 |
Operating cash flow | $116,710 |
Hence, the operating cash flow is $116,710.
Compute the operating cash flow for 2014:
Operating cash flow for 2014 | |
Particulars | Amount |
Earnings before interest and taxes | $93,964 |
Add: Depreciation | $54,230 |
$148,194 | |
Less: Taxes | $16,402 |
Operating cash flow | $131,792 |
Hence, the operating cash flow is $131,792.
4)
To calculate: The cash flow from assets
4)

Answer to Problem 2CC
The cash flow from assets for 2014 is $8,701.
Explanation of Solution
Formulae:
The formula to calculate the ending net working capital:
The formula to calculate the beginning net working capital:
The formula to calculate the change in net working capital:
The formula to calculate the cash flow from assets:
Compute the net capital spending:
Net capital spending | |
Particulars | Amount |
Ending net fixed assets | $264,021 |
Less: Beginning net fixed assets | $211,680 |
$52,341 | |
Add: Depreciation | $54,230 |
Net capital spending | $106,571 |
Hence, the net capital spending is $106,571.
Compute the ending net working capital:
Hence, the ending net working capital is $29,122.
Compute the beginning net working capital:
Hence, the beginning net working capital is $8,811.
Compute the change in net working capital:
Hence, the change in net working capital is $20,311.
Compute the cash flow from assets:
The operating cash flow is $131,792,the change in net working capital is $16,502 and the net capital spending is $106,571.
Hence, the cash flow from assets is $8,701.
5)
To calculate: The cash flow to creditors
5)

Answer to Problem 2CC
The cash flow to creditors is −$1,174.
Explanation of Solution
Given information:
Company SB has to pay interest expenses amounting to $11,954. The new net borrowings were $13,128
Formula:
Compute the cash flow to creditors:
Hence, the cash flow to creditors is −$1,174.
6)
To calculate: The cash flow to stockholders
6)

Answer to Problem 2CC
The cash flow to stockholders is $12,644.
Explanation of Solution
Given information:
Company S paid dividends amounting to $32,804.00. It issued new equity worth $20,160.
Formula:
Compute the cash flow to stockholders:
Hence, the cash flow to stockholders is $12,644.
To discuss: The cash flows of the company

Explanation of Solution
The earnings of the company were positive. It also had a positive cash flow from operations. The company paid $12,644 to the stockholders. The cash flow to creditors is negative. Hence, it raised $1,174 from creditors. The investment in net working capital was $20,311. It also invested $106,571 in fixed assets.
To discuss: The expansion plans of Person T

Explanation of Solution
Although Company SB has positive cash flow from operating activities, most of it goes for meeting the capital needs. The company is already using its cash flow to build assets. Moreover, it is raising additional capital from creditors through bonds. The expansion plans are risky because of the increased capital spending.
Want to see more full solutions like this?
Chapter 2 Solutions
ESSENTIAL OF CORP FINANCE W/CONNECT
- Q1: You are an analyst in charge of valuing common stocks. You have been asked to value two stocks. The first stock NEWER Inc. just paid a dividend of $6.00. The dividend is expected to increase by 60%, 45%, 30% and 15% per year, respectively, in the next four years. Thereafter, the dividend will increase by 4% per year in perpetuity. Calculate NEWER’s expected dividend for t = 1, 2, 3, 4 and 5.The required rate of return for NEWER stock is 14% compounded annually.What is NEWER’s stock price?The second stock is OLDER Inc. OLDER Inc. will pay its first dividend of $10.00 three (3) years from today. The dividend will increase by 30% per year for the following four (4) years after its first dividend payment. Thereafter, the dividend will increase by 3% per year in perpetuity. Calculate OLDER’s expected dividend for t = 1, 2, 3, 4, 5, 6, 7 and 8.The required rate of return for OLDER stock is 16% compounded annually.What is OLDER’s stock price?Now assume that both stocks have a required…arrow_forwardQ1: Blossom is 30 years old. She plans on retiring in 25 years, at the age of 55. She believes she will live until she is 105. In order to live comfortably, she needs a substantial retirement income. She wants to receive a weekly income of $5,000 during retirement. The payments will be made at the beginning of each week during her retirement. Also, Blossom has pledged to make an annual donation to her favorite charity during her retirement. The payments will be made at the end of each year. There will be a total of 50 annual payments to the charity. The first annual payment will be for $20,000. Blossom wants the annual payments to increase by 3% per year. The payments will end when she dies. In addition, she would like to establish a scholarship at Toronto Metropolitan University. The first payment would be $80,000 and would be made 3 years after she retires. Thereafter, the scholarship payments will be made every year. She wants the payments to continue after her death, therefore…arrow_forwardQ1: Blossom is 30 years old. She plans on retiring in 25 years, at the age of 55. She believes she will live until she is 105. In order to live comfortably, she needs a substantial retirement income. She wants to receive a weekly income of $5,000 during retirement. The payments will be made at the beginning of each week during her retirement. Also, Blossom has pledged to make an annual donation to her favorite charity during her retirement. The payments will be made at the end of each year. There will be a total of 50 annual payments to the charity. The first annual payment will be for $20,000. Blossom wants the annual payments to increase by 3% per year. The payments will end when she dies. In addition, she would like to establish a scholarship at Toronto Metropolitan University. The first payment would be $80,000 and would be made 3 years after she retires. Thereafter, the scholarship payments will be made every year. She wants the payments to continue after her death, therefore…arrow_forward
- Jerome Moore invests in a stock that will pay dividends of $2.00 at the end of the first year; $2.20 at the end of the second year; and $2.40 at the end of the third year. also, he believes that at the end of the third year he will be able to sell the stock for $33. what is the present value of all future benefits if a discount rate of 11 percent is applied?arrow_forwardQ1: You are an analyst in charge of valuing common stocks. You have been asked to value two stocks. The first stock NEWER Inc. just paid a dividend of $6.00. The dividend is expected to increase by 60%, 45%, 30% and 15% per year, respectively, in the next four years. Thereafter, the dividend will increase by 4% per year in perpetuity. Calculate NEWER’s expected dividend for t = 1, 2, 3, 4 and 5.The required rate of return for NEWER stock is 14% compounded annually.What is NEWER’s stock price?The second stock is OLDER Inc. OLDER Inc. will pay its first dividend of $10.00 three (3) years from today. The dividend will increase by 30% per year for the following four (4) years after its first dividend payment. Thereafter, the dividend will increase by 3% per year in perpetuity. Calculate OLDER’s expected dividend for t = 1, 2, 3, 4, 5, 6, 7 and 8.The required rate of return for OLDER stock is 16% compounded annually.What is OLDER’s stock price?Now assume that both stocks have a required…arrow_forwardQ1: You are an analyst in charge of valuing common stocks. You have been asked to value two stocks. The first stock NEWER Inc. just paid a dividend of $6.00. The dividend is expected to increase by 60%, 45%, 30% and 15% per year, respectively, in the next four years. Thereafter, the dividend will increase by 4% per year in perpetuity. Calculate NEWER’s expected dividend for t = 1, 2, 3, 4 and 5.The required rate of return for NEWER stock is 14% compounded annually.What is NEWER’s stock price?The second stock is OLDER Inc. OLDER Inc. will pay its first dividend of $10.00 three (3) years from today. The dividend will increase by 30% per year for the following four (4) years after its first dividend payment. Thereafter, the dividend will increase by 3% per year in perpetuity. Calculate OLDER’s expected dividend for t = 1, 2, 3, 4, 5, 6, 7 and 8.The required rate of return for OLDER stock is 16% compounded annually.What is OLDER’s stock price?Now assume that both stocks have a required…arrow_forward
- Q1: Blossom is 30 years old. She plans on retiring in 25 years, at the age of 55. She believes she will live until she is 105. In order to live comfortably, she needs a substantial retirement income. She wants to receive a weekly income of $5,000 during retirement. The payments will be made at the beginning of each week during her retirement. Also, Blossom has pledged to make an annual donation to her favorite charity during her retirement. The payments will be made at the end of each year. There will be a total of 50 annual payments to the charity. The first annual payment will be for $20,000. Blossom wants the annual payments to increase by 3% per year. The payments will end when she dies. In addition, she would like to establish a scholarship at Toronto Metropolitan University. The first payment would be $80,000 and would be made 3 years after she retires. Thereafter, the scholarship payments will be made every year. She wants the payments to continue after her death, therefore…arrow_forwardTrue and False 1. There are no more than two separate phases to decision making and problem solving. 2. Every manager always has complete control over all inputs and factors. 3. Opportunity cost is only considered by accountants as a way to calculate profits 4. Standard error is always used to evaluate the overall strength of the regression model 5. The t-Stat is used in a similar way as the P-valued is used 6. The P-value is used as R-square is used. 7. R-square is used to evaluate the overall strength of the model. 8. Defining the problem is one of the last things that a manager considers Interpreting Regression Printouts (very brief answers) R² = .859 Intercept T N = 51 Coefficients 13.9 F= 306.5 Standard Error .139 SER=.1036 t Stat P value 99.8 0 .275 .0157 17.5 0 The above table examines the relationship between the nunber, of poor central city households in the U.S. and changes in the costs of college tuition from 1967 to 2019. 9. What is the direction of this relationship? 10.…arrow_forwardCARS Auto Co. Ltd – Alpha Branch Unadjusted Trial Balance December 31, 2024 A/C NAME TRIAL BALANCE DR CR cash 240,000 Accounts receivables 120,000 supplies 41,100 Lease hold improvement 200,000 Accumulated depreciation – Lease hold improvement 80,000 Furniture and fixtures 800,000 Accumulated depreciation - furniture and fixtures 380,000 Accounts payable 30,000 Salary payable Unearned service revenue 44,100 Cars, capital 649,000 Cars, withdrawal 165,100 Service revenue 450,000 Salary expense 48,400 Supplies expense Rent expense Depreciation expense – leasehold improvement Depreciation expense – furniture and fixtures Advertising expense 18,500 1,633,100 1,633,100 Data presented for the adjusting entries include the following: Rent expense of $160,000…arrow_forward
- Scenario: Jim played football for a famous club but, due to a long term injury and on medical advice, he retired from the game in January 2007. The club, grateful for Jim’s contribution to their success over the years, held a testimonial match in Jim’s honour. Jim received €150,000 from this testimonial match and he decided to open a shop selling sporting goods with the proceeds. On 1 May 2007, Jim opened a business bank account into which he paid the €150,000. In the first year of trading, he undertook the following transactions: 2 May 2007: Jim signed a five year lease on a shop in the town centre and paid €50,000 to cover the lease for the whole five years 3 May 2007: Jim paid shop fitters €10,000 for shelves and racking and for the electronic till in which to record sales. Jim expects these assets will also have a useful life of 5 years. He hired a part time assistant at a cost of €250 per month paid monthly by cheque from the business bank account. While his main business is to…arrow_forwardHelp with questions 7-24arrow_forwardCARS Auto Co. Ltd – Alpha Branch Unadjusted Trial Balance December 31, 2024 Data presented for the adjusting entries include the following: Rent expense of $160,000 paid for the year was debited to CARS withdrawal account because of an oversight on the part of the Data Entry Clerk and this remained unadjusted as at year end. The company paid $24,330 on account for a credit purchase made earlier in the year but this entry was not recorded at year end. Supplies on hand at year end, $1,100. Depreciation on Leasehold improvement, $20,000. Depreciation on Furniture and Fixtures, $80,000. Salaries owed but not yet paid, $64,450. Accrued service revenue, $65,420. $44,000 of the unearned service revenue has been earned. Requirements: Explain why adjusting entries are required. Prepare the adjusting journal entries at December 31st, 2024. Open the ledger accounts in T-account form with their unadjusted balances then post the adjusting entries to the affected accounts, then balance off each…arrow_forward
- Essentials Of InvestmentsFinanceISBN:9781260013924Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.Publisher:Mcgraw-hill Education,
- Foundations Of FinanceFinanceISBN:9780134897264Author:KEOWN, Arthur J., Martin, John D., PETTY, J. WilliamPublisher:Pearson,Fundamentals of Financial Management (MindTap Cou...FinanceISBN:9781337395250Author:Eugene F. Brigham, Joel F. HoustonPublisher:Cengage LearningCorporate Finance (The Mcgraw-hill/Irwin Series i...FinanceISBN:9780077861759Author:Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan ProfessorPublisher:McGraw-Hill Education





