1)
To prepare: The income statement of Company SB for the years 2010 and 2011.
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.
Case summary:
Company SB manufactures surf boards. It was founded by Person T. Initially, the company was funded by the 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 C to evaluate the performance of the company. Person C collects the following information about the company:
Particulars | 2010 | 2011 |
Sales | $ 163,849 | $ 206,886 |
Cost of goods sold | $ 23,643 | $ 35,721 |
$ 46,255 | $ 52,282 | |
Interest | $ 10,056 | $ 11,526 |
Selling and administrative | $ 33,223 | $ 42,058 |
Cash | $ 41,786 | $ 47,325 |
Accounts receivable | $ 204,068 | $ 248,625 |
Inventory | $ 321,437 | $ 391,810 |
Net fixed assets | $ 16,753 | $ 21,732 |
Accounts payable | $ 19,046 | $ 20,796 |
Notes payable | $ 103,006 | $ 116,334 |
Long-term debt | $ 32,255 | $ 43,381 |
New equity | $ 0 | $ 20,500 |
Characters in the case:
- Company SB
- Person T: Owner of Company SB
- Person C: Financial analyst
1)
Answer to Problem 2M
The net income for 2010 and 2011are $54,443 and $63,246 respectively.
Explanation of Solution
Given information:
Particulars | 2010 | 2011 |
Sales | $ 163,849 | $ 206,886 |
Cost of goods sold | $ 23,643 | $ 35,721 |
Depreciation | $ 46,255 | $ 52,282 |
Interest | $ 10,056 | $ 11,526 |
Selling and administrative | $ 33,223 | $ 42,058 |
Cash | $ 41,786 | $ 47,325 |
Accounts receivable | $ 204,068 | $ 248,625 |
Inventory | $ 321,437 | $ 391,810 |
Net fixed assets | $ 16,753 | $ 21,732 |
Accounts payable | $ 19,046 | $ 20,796 |
Notes payable | $ 103,006 | $ 116,334 |
Long-term debt | $ 32,255 | $ 43,381 |
New equity | $ 0 | $ 20,500 |
Prepare the income statement for 2010:
Company S | ||
Income statement for the year 2010 | ||
Particulars | Amount | Amount |
Net sales | $ 321,437 | |
Less: | ||
Costs | 163,849 | |
Other expenses | 33,223 | |
Depreciation | 46,255 | $243,327 |
Earnings before interest and taxes | $ 78,110 | |
Less: Interest paid | 10,056 | |
Taxable income | $ 68,054 | |
Less: Taxes ($68,054×20%) | $13,611 | |
Net income (A) | $ 54,443 | |
Dividends (B)=(A)×50% | $ 27,222 | |
Addition to |
$ 27,222 |
Hence, the net income for 2010 is $54,443.
Prepare the income statement for 2011:
Company S | ||
Income statement for the year 2011 | ||
Particulars | Amount | Amount |
Net sales | $ 391,810 | |
Less: | ||
Costs | 206,886 | |
Other expenses | 42,058 | |
Depreciation | 52,282 | $301,226 |
Earnings before interest and taxes | $ 90,584 | |
Less: Interest paid | 11,526 | |
Taxable income | $ 79,058 | |
Less: Taxes ($79,058×20%) | 15,812 | |
Net income (A) | $ 63,246 | |
Dividends (B)=(A)×50% | $ 31,623 | |
Addition to retained earnings (A)−(B) | $ 31,623 |
Hence, the net income for 2011 is $63,426.
2)
To prepare: The
Introduction:
The balance sheet refers to the statement that indicates the financial position of a firm.
2)
Answer to Problem 2M
The total assets of the company for the year 2010 and 2011are $276,719 and $349,459 respectively.
Explanation of Solution
Given information:
Particulars | 2010 | 2011 |
Sales | $ 163,849 | $ 206,886 |
Cost of goods sold | $ 23,643 | $ 35,721 |
Depreciation | $ 46,255 | $ 52,282 |
Interest | $ 10,056 | $ 11,526 |
Selling and administrative | $ 33,223 | $ 42,058 |
Cash | $ 41,786 | $ 47,325 |
Accounts receivable | $ 204,068 | $ 248,625 |
Inventory | $ 321,437 | $ 391,810 |
Net fixed assets | $ 16,753 | $ 21,732 |
Accounts payable | $ 19,046 | $ 20,796 |
Notes payable | $ 103,006 | $ 116,334 |
Long-term debt | $ 32,255 | $ 43,381 |
New equity | $ 0 | $ 20,500 |
Prepare the balance sheet for 2010:
Company S | |||
Balance sheet | |||
For the year 2010 | |||
Assets | Amount | Liabilities | Amount |
Current assets | Current liabilities | ||
Cash | $23,643 | Accounts payable | $41,786 |
Accounts receivable | $16,753 | Notes payable | $19,046 |
Inventory | $32,255 | Total | $60,832 |
Total (A) | $72,651 | ||
Long-term debt | $ 103,006 | ||
Fixed assets | |||
Tangible net fixed assets (B) | $ 204,068 | Shareholders' equity | |
Owners' equity | $ 112,881 | ||
Total assets (A)+(B) | $276,719 | Total liabilities and shareholders' equity | $276,719 |
Note: The sum of the current liabilities and long term debt is subtracted from the total liabilities and shareholders’ equity to compute the owners’ equity.
Hence, the total assets of Company SBin 2010are $276,719.
Prepare the balance sheet for 2011:
The common stock of 2011 includes the new equity raised, amounting to $20,500.
Company S | |||
Balance sheet | |||
For the year 2011 | |||
Assets | Amount | Liabilities | Amount |
Current assets | Current liabilities | ||
Cash | $ 35,721 | Accounts payable | $ 47,325 |
Accounts receivable | 21,732 | Notes payable | 20,796 |
Inventory | 43,381 | Total | $ 68,121 |
Total (A) | $ 100,834 | ||
Long-term debt | $ 116,334 | ||
Fixed assets | |||
Tangible net fixed assets (B) | $ 248,625 | Shareholders' equity | |
Owners' equity | $ 165,004 | ||
Total assets (A)+(B) | $349,459 | Total liabilities and shareholders' equity | $349,459 |
Note: The owners’ equity is computed by adding the owners’ equity for the year 2010, in addition to the retained earnings in the income statement of 2011 and the given new equity.
Hence, the total assets of Company SB in 2011are $349,459.
3)
To calculate: The operating cash flow for 2010 and 2011.
Introduction:
The balance sheet refers to the statement that indicates the financial position of a firm.
3)
Answer to Problem 2M
The operating cash flow for 2010 is $110,754. The operating cash flow for 2011 is $127,054.
Explanation of Solution
Given information:
The earnings before interest and taxes is $78,110 and $90,584 for the years 2010 and 2011 respectively. The depreciation is $46,255and $52,282 for the years 2010 and 2011 respectively. The taxes are $13,611 and $15,812 for the years 2010 and 2011 respectively.
Compute the operating cash flow for 2010:
Company S | |
Operating cash flow for 2010 | |
Particulars | Amount |
Earnings before interest and taxes | $78,110 |
Add: Depreciation | $46,255 |
$124,365 | |
Less: Taxes | $13,611 |
Operating cash flow | $110,754 |
Hence, the operating cash flow is $110,754.
Compute the operating cash flow for 2011:
Company S | |
Operating cash flow for 2011 | |
Particulars | Amount |
Earnings before interest and taxes | $90,584 |
Add: Depreciation | $52,282 |
$142,866 | |
Less: Taxes | $15,812 |
Operating cash flow | $127,054 |
Hence, the operating cash flow is $127,054.
4)
To calculate: The cash flow from assets.
Introduction:
The balance sheet refers to the statement that indicates the financial position of a firm.
4)
Answer to Problem 2M
The cash flow from assets for 2011 is $9,321.
Explanation of Solution
Formulae:
Compute the net capital spending:
Company S | |
Net capital spending | |
Particulars | Amount |
Ending net fixed assets | $248,625 |
Less: Beginning net fixed assets | $204,068 |
$44,557 | |
Add: Depreciation | $52,282 |
Net capital spending | $96,839 |
Hence, the net capital spending is $96,839.
Compute the ending net working capital:
Hence, the ending net working capital is $32,713.
Compute the beginning net working capital:
Hence, the beginning net working capital is $11,819.
Compute the change in net working capital:
Hence, the change in net working capital is $20,894.
Compute the cash flow from assets:
The operating cash flow is $127,054. The change in net working capital is $20,894, and the net capital spending is $96,839.
Hence, the cash flow from assets is $9,321.
5)
To calculate: The cash flow to creditors.
Introduction:
The balance sheet refers to the statement that indicates the financial position of a firm.
5)
Answer to Problem 2M
The cash flow to creditors is ($1,802).
Explanation of Solution
Given information:
Company S had to pay interest expenses amounting to $11,526. The new net borrowings were $13,328
Formula:
Compute the cash flow to creditors:
Hence, the cash flow to creditors is ($1,802).
6)
To calculate: The cash flow to stockholders.
Introduction:
The balance sheet refers to the statement that indicates the financial position of a firm.
6)
Answer to Problem 2M
The cash flow to stockholders is ($11,123).
Explanation of Solution
Given information: Company SB paid dividends amounting to $31,623. It issued new equity worth $20,500.
Formula:
Compute the cash flow to stockholders:
Hence, the cash flow to stockholders is $11,123.
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Chapter 2 Solutions
Fundamentals of Corporate Finance Standard Edition
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