Topic 3 Practice Problems

P4-5
P4-6
P4-9
P4-15
P4-18

P4-5 Classifying inflows and outflows of cash Classify each of the following items as an inflow (I) or an outflow (O) of cash, or as neither (N).
Item Change ($) Item Change ($)
Cash +100 Accounts receivable -700
Accounts Payable -1,000 Net Profits +600
Notes Payable +500 Depreciation +100
Long-term debt -2,000 Repurchase of stock +600
Inventory +200 Cash dividends +800
Faxed assets +400 Sale of stock +1,000

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P4-6 Keith Corporation Balance Sheets
December 31 December 31
Assets` 2015 2014
Cash $ 1,500 $ 1,000
Marketable securities 1,800 1,200
Accounts receivable 2,000 1,800
Inventories 2,900 2,800
Total current assets $ 8,200 $ 6,800
Gross fixed assets $29,500 $28,100
Less: Accumulated depreciation 14,700 13,100
Net fixed assets $14,800 $15,000
Total assets $23,000 $21,800

Liabilities and stockholders equity
Accounts payable $ 1,600 $ 1,500
Notes payable 2,800 2,200
Accruals 200 300
Total current liabilities $ 4,600 $ 4,000
Long-term debt 5,000 5,000
Total liabilities $ 9,600 $ 9,000
Common stock $10,000 $10,000
Retained earnings 3,400 2,800
Total stockholders equity $13,400 $12,800
Total liabilities and stockholders equity $23,000 $21,800

Continuation of p4-6
P4-6 Keith Corporation Income Statement Data (2015)
Depreciation expense $1,600
Earnings before interest and taxes (EBIT) 2,700
Interest expense 367
Net profits after taxes 1,400
Tax rate 40%
A. Calculate the firms net operating profit after taxes (NOPAT) for the year ended December 31, 2015, using Equation 4.1. Definition- Operating Cash Flow A firms operating cash flow (OCF) is the cash flow it generates from its normal operations: producing and selling its output of goods or services. A variety of definitions of OCF can be found in the financial literature. The definition introduced here excludes the impact of interest on cash flow. We exclude those effects because we want a measure that captures the cash flow generated by the firms operations, not by how those operations are financed and taxed. The first step is to calculate net operating profits after taxes (NOPAT), which represent the firms earnings before interest and after taxes. Letting T equal the applicable corporate tax rate, NOPAT is calculated as NOPAT = EBIT * (1 – T)

B. Calculate the firms operating cash flow (OCF) for the year ended December 31, 2015, using Equation 4.3- OCF = 3EBIT * (1 – T) 4 + Depreciation.

C. Calculate the firms free cash flow (FCF) for the year ended December 31, 2015, using Equation 4.4. – FCF = OCF – Net fixed asset investment (NFAI) Net current asset investment (NCAI)

P4-9 Cash budget: Basic Grenoble Enterprises had sales of $50,000 in March and $60,000 in April. Forecast sales for May, June, and July are $70,000, $80,000, and $100,000, respectively. The firm has a cash balance of $5,000 on May 1 and wishes to maintain a minimum cash balance of $5,000. Given the following data, prepare and interpret a cash budget for the months of May, June, and July.
1. The firm makes 20% of sales for cash, 60% are collected in the next month, and the remaining 20% are collected in the second month following sale.
2. The firm receives other income of $2,000 per month.
3. The firms actual or expected purchases, all made for cash, are $50,000, $70,000, and $80,000 for the months of May through July, respectively.
4. Rent is $3,000 per month.
5. Wages and salaries are 10% of the previous months sales.
6. Cash dividends of $3,000 will be paid in June.
7. Payment of principal and interest of $4,000 is due in June.
8. A cash purchase of equipment costing $6,000 is scheduled in July.
9. Taxes of $6,000 are due in June.

P4-15. Part one. Pro forma income statement The marketing department of Metroline Manufacturing estimates that its sales in 2016 will be $1.5 million. Interest expense is expected to remain unchanged at $35,000, and the firm plans to pay $70,000 in cash dividends during 2016. Metroline Manufacturings income statement for the year ended December 31, 2015, and a breakdown of the firms cost of goods sold and operating expenses into their fixed and variable components are given below.
A. Use the percent-of-sales method to prepare a pro forma income statement for the year ended December 31, 2016.
B. Use fixed and variable cost data to develop a pro forma income statement for the year ended December 31, 2016.
C. Compare and contrast the statements developed in parts a and b. Which statement probably provides the better estimate of 2016 income Explain why.

Continuation of P4-15. Part 2
Metroline Manufacturing Income Statement for the Year Ended December 31, 2015
Sales revenue $1,400,000
Less: Cost of goods sold 910,000
Gross profits $ 490,000
Less: Operating expenses 120,000
Operating profits $ 370,000
Less: Interest expense 35,000
Net profits before taxes $ 335,000
Less: Taxes (rate = 40% 134,000
Net profits after taxes $ 201,000
Less: Cash dividends 66,000
To retained earnings $ 135,000

Continuation of P4-15 Part 3.
Metroline Manufacturing Breakdown of Costs and Expenses into Fixed and Variable Components for the Year Ended December 31, 2015
Cost of goods sold
Fixed cost $210,000
Variable cost 700,000
Total costs 910,000
Operating expenses
Fixed expenses $36,000
Variable expenses 84,000
Total expenses $120,000

P4-18. Pro forma balance sheet Peabody & Peabody has 2015 sales of $10 million. It wishes to analyze expected performance and financing needs for 2017, which is 2 years ahead. Given the following information, respond to parts a and b.
(1) (1) The percents of sales for items that vary directly with sales are as follows: Accounts receivable 12% , Inventory 18%, Accounts payable 14%, and Net profit margin 3%.
(2) Marketable securities and other current liabilities are expected to remain unchanged.
(3) A minimum cash balance of $480,000 is desired.
(4) A new machine costing $650,000 will be acquired in 2016, and equipment costing $850,000 will be purchased in 2017. Total depreciation in 2016 is forecast as $290,000, and in 2017 $390,000 of depreciation will be taken.
(5) Accruals are expected to rise to $500,000 by the end of 2017.
(6) No sale or retirement of long-term debt is expected.
(7) No sale or repurchase of common stock is expected.
(8) The dividend payout of 50% of net profits is expected to continue.
(9) Sales are expected to be $11 million in 2016 and $12 million in 2017.
10. The December 31, 2015, balance sheet follows.

P4-18 Part 2, Peabody & Peabody Balance Sheet December 31, 2015 ($000)
Assets Liabilities and stockholders equity
Cash $400 Accounts payable $1,400
Marketable securities 200 Accruals 400
Accounts receivable 1,200 Other current liabilities 80
Inventories 1,800 Total current liabilities $1,880
Total current assets $3,600 Long-term debt 2,000
Net fixed assets 4,000 Total liabilities 3,880
Total assets $7,600 Common equity 3,720
Total liabilities and
stockholders equity $7,600

A. Prepare a pro forma balance sheet dated December 31, 2017.
B. Discuss the financing changes suggested by the statement prepared in part a.