Park & Sharp-Bette Chapter 1

1. Consider the following balance sheet for RCC Corp. Assets Cash Accounts Receivable Inventories Manufacturing Cost Initial 600,000 Depreciation 300,000 Net Assets Land Liabilities & Shareholders Equity Notes(Loans) Payable Accounts Payable Long Term Mortgage Bonds Preferred Stock, 6% $ 100 par value(1,000 shares) Common Stock $10 par value (20,000 shares) Capital Surplus Retained Earnings 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 stock preferred 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 $ 50,000 50,000 150,000

300,000 150,000

50,000 100,000 100,000 100,000 200,000 100,000 50,000

3. The inventory account for item X showed the following information: Balance Jan 1 Purchase Jan 11 Purchase Feb 14 Purchase Feb 29 Purchase March 26 Sold March 30 100 units @ 1.90 100 units @ 2.00 200 units @ 1.80 250 units @ 2.10 150 units @ 2.20 600 units $ 190.00 $ 200.00 $ 360.00 $ 525.00 $ 330.00

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 100 100 100 200 200 400 250 650 150 800 600 units are consumed Unit Cost 1.9 2.0 1.80 2.10 2.20 Value 190 200 360 525 330 Total Value 190 390 750 1275 1605

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 LIFO Value = 1605 value of last 600 units = 1605 (1605 390) = 390

4. A project under consideration is expected to change the firms financial position for the first year. The specific details for this specific project are: Sales $ 500,000 Manufacturing Costs of Sales Direct Labor 35,000 Direct Material 25,000 Overhead 10,000 Depreciation 30,000 $ 100,000 Selling & Administrative Expenses $ 25,000 Equipment Purchase $ 100,000 Decrease in cash revenue of other products $ 10,000 Increase in accounts receivable $ 30,000 Increase in inventory $ 20,000 Increase in current liabilities $ 30,000 Income taxes associated with the project $ 100,000 Repayment 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 Flow Sales 500,000 Cost of Goods Sold DL 35,000 DM 25,000 OH 10,000 Dep 30,000 Total 100,000 100,000 400,000 Selling Expense 25,000 375,000 Taxes 100,000 Net Income 275,000 Cash Flows(unadjusted) = Net Profits + Depreciation = 275,000 + 30,000 = 305,000 Increases Decreases Adjustments to Cash Flows (Sources) (Uses) Equipment Purchase 100,000 AR-Increase 30,000 Inv Increase 20,000 Current Liability-Inc(AP) 30,000 Loan Repayment 50,000 Cash Decrease -Other Prog 10,000 40,000 200,000 Net Adj 40,000 200,000 = -160,000 Cash Flows Adjusted = 305,000 160,000 = 145,000 Adjustments Increases Decreases Equipment Inc 100,000 Loan Payment 50,000 Working 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 Cost of goods sold Labor Material Depreciation Total Operating Expenses Interest Expenses Income Taxes $ 1,000,000 $ 150,000 $ 200,000 $ 20,000 $ 370,000 $ 146,000 $ 10,000 $ 105,000

Other Information 1) 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) Solution Sales COGS Labor Matl Dep Opr Expense Int Exp Gross Profits Taxes Net Profits 150,000 200,000 20,000 370,000 146,000 10,000 526,000

1,000,000

526,000 474,000 165,900 308,100

Cash Flows = net profits + depreciation = 308,100 + 20,000 = 328,100 Increases Decreases Adjustments (Sources) (Uses) New Equipment 200,000 Loan 100,000 Working Capital 10,000 100,000 210,000 Net 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 Bakery Income Statement for 2010 $ 136,200

Revenues Expenses Dough Ingredients Beginning Inventory $ 0 Purchases $ 56,000 Ending Inventory $ 2,200 Cost of Ingredients Wages Rentals Depreciation(20% of $8,000) Utilities($ 5,400 + $ 500) Miscellaneous Supplies Interest($ 6,000 @ 12%) Total Expenses Operating Profit before tax Income Tax (18.5%) Net Income

$ 53,800 $ 44,000 $ 11,100 $ 1,600 $ 5,900 $ 2,000 $ 720 $ 119,120 $ 17,080 $ 3,100 $ 13,920

Sweet Tooth Bakery Balance Sheets Assets Current Assets Cash Accounts Receivable Inventories Fixed Assets Equipment Cost Depreciation Net Fixed Assets Total Assets Liabilities and Owners Equity Current Liabilities Accounts Payable Deferred Revenue Accrued Interest Long-term Liabilities Mortgage Note Payable Owners Equity Contributed Capital Retained Earnings Total Equities Prepare the cash flow statement for the year 2010. 1-6 Cash Flows = Net Profits + Dep = 13,920 + 1,600 = 15,520 Increases Decreases Adjustments (Sources) (Uses) Short Term Loan 6,000 New Equipment 8,000 AP Increase 2,800 Adv Revenue 500 Accured Int 720 AR Increase 200 Inventory Inc 2,200 Totals 10,020 10,400 Net Adjustment = -380 Adjusted 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) = -1,620 A 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 December 2009 $ 5,400 0 0 ( $ 8,000) ( $ 1,600) 0 5,400 6,400 29,340 December 2010 $ 20,540 200 2,200

0 0 0

2,800 500 720

0 5,400 0 5,400

6,000 5,400 13,920 29,340