Park & Sharp-Bette

Chapter 1

1. Consider the following balance sheet for RCC Corp.

Assets $Cash 50,000Accounts Receivable 50,000Inventories 150,000Manufacturing Cost – Initial 600,000

Depreciation 300,000Net Assets 300,000

Land 150,000

Liabilities & Shareholders EquityNotes(Loans) Payable 50,000Accounts Payable 100,000Long Term Mortgage Bonds 100,000Preferred Stock, 6% $ 100 par value(1,000 shares) 100,000Common Stock $10 par value (20,000 shares) 200,000Capital Surplus 100,000Retained Earnings 50,000

a. What is the firms working capital? ______

Working Capital = Current Assets – Current Liabilities ( Cash + AR + Inventories) - ( AP + Notes Payable)= ( 50,000 + 50,000 + 150,000) – (50,000 + 100,000)= 250,000 – 150,000= 100,000(increase in working capital)

b. If the firm had the net income after taxes of $ 100,000, what were the earnings per share?______ Earnings per Share(EPS)

EPS = (net income after taxes – preferred dividends)/# of shares of common stockpreferred dividends = dividend rate x # of shares x par value)

= 0.6 x 1,000 x $ 100 = 6,000 EPS = ( 100,000 – 6,000 ) / 20,000 = $ 4.70/share

c. What was the market price of the stock per share when the firm issued its common stock?______Capital Surplus = Market Price(Value) – Book Value

100,000 = MP x 20,000 shares - 20,000 x 10 (common stock par value) 100,000 = 20,000 (MP – 10) 5 = MP – 10

MP = 15

3. The inventory account for item X showed the following information:

Balance Jan 1 100 units @ 1.90 $ 190.00Purchase Jan 11 100 units @ 2.00 $ 200.00Purchase Feb 14 200 units @ 1.80 $ 360.00Purchase Feb 29 250 units @ 2.10 $ 525.00Purchase March 26 150 units @ 2.20 $ 330.00

Sold March 30 600 units

The ending inventory on March 31 consists of 200 units. a. Determine the value of the ending inventory based on FIFO.______b. Determine the value of the ending inventory based on LIFO______

Units Total Units Unit Cost Value Total Value100 100 1.9 190 190100 200 2.0 200 390200 400 1.80 360 750250 650 2.10 525 1275150 800 2.20 330 1605

600 units are consumed

a) Determine the Inventory Value Using FIFO Value = 1605 – Value of first 600 units = 1605 – (750(value of first 400 units) + 200 x 2.1)

= 1605 – (750 + 420) = 1605 – 1170 = 435

b)Determine the Inventory Value Using LIFOValue = 1605 – value of last 600 units = 1605 – (1605 – 390) = 390

4. A project under consideration is expected to change the firm’s financial position for the first year. The specific details for this specific project are:Sales $ 500,000Manufacturing Costs of Sales

Direct Labor 35,000Direct Material 25,000Overhead 10,000Depreciation 30,000 $ 100,000

Selling & Administrative Expenses $ 25,000Equipment Purchase $ 100,000Decrease in cash revenue of other products $ 10,000Increase in accounts receivable $ 30,000Increase in inventory $ 20,000Increase in current liabilities $ 30,000Income taxes associated with the project $ 100,000Repayment of old loan $ 50,000 a) Determine the Change in the firms working Capital(see page 24 for definition of working capital)Working Capital Requirement(needs) = Change in Current Assets – Change in Current Liabilities

= (Cash Increase+ Inv Increase + Acts Rec Inc) – (Acts Pay Inc + Notes Payable Inc)= ( -10,000 + 20,000 + 30,000 ) - ( 30,000 )

= 10,000 (old loan is assumed to be more than 1 year) b) Determine Net Cash FlowSales 500,000 Cost of Goods Sold

DL 35,000DM 25,000OH 10,000Dep 30,000 Total 100,000 100,000

400,000Selling Expense 25,000

375,000Taxes 100,000Net Income 275,000Cash Flows(unadjusted) = Net Profits + Depreciation = 275,000 + 30,000 = 305,000

Increases Decreases Adjustments to Cash Flows (Sources) (Uses)

Equipment Purchase 100,000AR-Increase 30,000Inv –Increase 20,000Current Liability-Inc(AP) 30,000Loan Repayment 50,000Cash Decrease -Other Prog 10,000

40,000 200,000Net Adj – 40,000 – 200,000 = -160,000Cash Flows Adjusted = 305,000 – 160,000 = 145,000Adjustments Increases Decreases

Equipment Inc 100,000Loan Payment 50,000Working Capital Change 10,000

160,000

5. ABC Manufacturing is considering a project that will add a new line of product. The income statement for the first project year are estimated as:

Sales $ 1,000,000Cost of goods sold

Labor $ 150,000Material $ 200,000Depreciation $ 20,000Total $ 370,000

Operating Expenses $ 146,000Interest Expenses $ 10,000Income Taxes $ 105,000

Other Information1) The firm will purchase new equipment worth $ 200,000 at the beginning of the year. The purchase will be financed by paying $ 100,000 in cash and borrowing the remaining $ 100,000 from a local bank at 10% interest payable at the end of each year. The $ 10,000 interest expense shown in the income statement represents the interest payment at the end of the year.

2) The project requires $ 10,000 in working capital. a. Determine the net cash flow from the project during the first year.(determine the sources and uses of cash in determining the net cash flow)

5) SolutionSales 1,000,000COGS

Labor 150,000Mat’l 200,000Dep 20,000

370,000Opr Expense 146,000Int Exp 10,000

526,000 526,000Gross Profits 474,000Taxes 165,900Net Profits 308,100

Cash Flows = net profits + depreciation = 308,100 + 20,000 = 328,100Increases Decreases

Adjustments (Sources) (Uses)New Equipment 200,000Loan 100,000Working Capital 10,000

100,000 210,000Net Adjustment = -110,000 = Increases – Purchases - Working Capital Requirements

Adjusted Cash Flows = 328,100 – 110,000 = 218,100

6. Dr. Bob started the Sweet Tooth Bakery on January 1, 2010. The first order of business was to purchase equipment costing $ 8,000 for which $ 2,000 was paid in cash and a note was signed for the remaining $ 6,000 payable in full plus 12 % interest one year later. Dr. Bob intends to depreciate the equipment on a MACRS basis over 5 years. During the first year of operation, the bakery had cash sales of $ 136,000. Cash expenses included $ 56,000 for dough ingredients, $ 44,000 for wages, $ 1,500 for equipment rentals, $9,600 for store rental, $ 5,400 for utilities, $ 2,000 for miscellaneous supplies, and $ 3,160 in payment of estimated taxes. As of December 31, 2010, there was an unpaid bill of $ 500 for December utilities and $ 2,300 was owed to its ingredients vendor. The bakery had only $ 2,200 of inventory on hand at the end of the year and there was no beginning inventory. A customer paid the bakery $ 500 in advance for a wedding cake to be delivered in January, 2011 and a university owed the bakery $ 200 for a cake delivered in early December, 2010. The income statement and balance sheets were:

Sweet Tooth BakeryIncome Statement for 2010

Revenues $ 136,200Expenses

Dough IngredientsBeginning Inventory $ 0Purchases $ 56,000Ending Inventory $ 2,200

Cost of Ingredients $ 53,800Wages $ 44,000Rentals $ 11,100Depreciation(20% of $8,000) $ 1,600Utilities($ 5,400 + $ 500) $ 5,900Miscellaneous Supplies $ 2,000Interest($ 6,000 @ 12%) $ 720

Total Expenses $ 119,120Operating Profit before tax $ 17,080Income Tax (18.5%) $ 3,100Net Income $ 13,920

Sweet Tooth BakeryBalance Sheets

December 2009 December 2010Assets $ $ Current Assets

Cash 5,400 20,540Accounts Receivable 0 200Inventories 0 2,200

Fixed AssetsEquipment Cost ( $ 8,000) Depreciation ( $ 1,600) Net Fixed Assets 0 6,400

Total Assets 5,400 29,340Liabilities and Owners Equity Current Liabilities

Accounts Payable 0 2,800Deferred Revenue 0 500Accrued Interest 0 720

Long-term Liabilities

Mortgage Note Payable 0 6,000 Owners Equity

Contributed Capital 5,400 5,400Retained Earnings 0 13,920 Total Equities 5,400 29,340

Prepare the cash flow statement for the year 2010.1-6 Cash Flows = Net Profits + Dep = 13,920 + 1,600 = 15,520

Increases DecreasesAdjustments (Sources) (Uses) Short Term Loan 6,000New Equipment 8,000AP – Increase 2,800Adv Revenue 500Accured Int 720AR – Increase 200Inventory Inc 2,200 Totals 10,020 10,400Net Adjustment = -380Adjusted Cash Flows = 15,520 – 380 = 15,140

Working Capital Change = Change in current assets – change in current liabilities (200 + 2,200) - (2,800 + 720 + 500) = -1,620A negative working capital means less funds for future operations(ie we are spending more than is coming in) Adjustments = Increases(loans)–Decreases(purchases) - Working Capital(money available for future operation) = 6,000 - 8,000 - (-1,620) = -380