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Chapter
McGraw-Hill/Irwin Copyright © 2006 by The McGraw-Hill Companies, Inc. All rights reserved.
2•Financial Statements, Taxes,
and Cash Flow •Financial Statements, Taxes,
and Cash Flow
Chapter 02 – Index of Sample Problems
• Slide # 03 - 10 Understanding a balance sheet• Slide # 11 - 12 Market value versus book value• Slide # 13 - 18 Understanding an income statement• Slide # 19 - 20 Earnings per share• Slide # 21 - 22 Dividends per share• Slide # 23 - 24 Average tax rate• Slide # 25 - 26 Marginal tax rate• Slide # 27 - 28 Operating cash flow• Slide # 29 - 34 Net capital spending
(index continued on next slide)
Chapter 02 – Index of Sample Problems
• Slide # 35 - 36 Change in net working capital• Slide # 37 - 38 Cash flow from assets• Slide # 39 - 41 Cash flow to creditors• Slide # 43 - 44 Cash flow to stockholders
3: Understanding a balance sheet
Answer these questions based on the balance sheet shown on slide # 4. Use 2005 values.
1. What is the amount of the current assets?2. What is the amount of the long-term assets?3. What is the amount of the current liabilities?4. What is the amount of the long-term debt?5. What is the amount of the stockholders’ equity?
Answers on slide # 5.
4: Understanding a balance sheet
WISDOM, INC.Balance Sheets
($ in millions)
2004 2005 2004 2005 Assets Liabilities and Owners’ Equity
Cash $ 199 $ 203 Accounts payable $ 219 $ 187
Accounts receivable 436 421 Notes payable 193 546
Inventory 504 497 Total 412 733
Total 1,139 1,121 Long-term debt 470 533
Net fixed assets 1,574 1,633 Total 882 1,266
Common stock and paid in surplus
690 650
Retained earnings 1,141 838
Total 1,831 1,488
Total assets$2,713 $2,754
Total liabilities and
owners’ equity$2,713 $2,754
5: Understanding a balance sheet
Answers to questions from slide # 3.
$1,488m
$838m 650m $ 2005for equity rs'Stockholde
$533m 2005for debt term-Long
$733m
$546m $187m 2005for sliabilitieCurrent
$1,633m 2005for assets termLong
$1,121m
$497m $421m $203m 2005for assetsCurrent
6: Understanding a balance sheet
The Dinmore Company has total assets of $6.4 million, current assets of $2.3 million, current liabilities of $2.5 million and total liabilities of $4.2 million.
1. What is the amount of the stockholders’ equity?2. What is the amount of the net working capital?3. What is the amount of the long-term assets?4. What is the amount of the long-term debt?
Answers on slides # 7-8.
7: Understanding a balance sheet
Answers to slide # 6.
$0.2m-
$2.5m - $2.3m
sliabilitieCurrent - assetsCurrent capital gNet workin
$2.2m
$4.2m - $6.4m
sliabilitie Total - assets Total equity rs'Stockholde
8: Understanding a balance sheet
Answers to slide # 6.
$1.7m
$2.5m - $4.2m
sliabilitieCurrent - sliabilitie Total sliabilitie term-Long
$4.1m
$2.3m - $6.4m
assetsCurrent - assets Total assets term-Long
9: Understanding a balance sheet
Your company has current assets of $250 million, total assets of $395 million and long-term debt of $116 million. The net working capital is $19 million.
1. What is the amount of the current liabilities?
2. What is the amount of the total equity?
Answers on slide # 10.
10: Understanding a balance sheet
$48m
$347m - $395m
sliabilitie Total - assets Total equity Total
$347m
$116m $231m
sliabilitie term-Long sliabilitieCurrent sliabilitie Total
$231m
$19m - $250m
capital gNet workin- assetsCurrent sliabilitieCurrent
sliabilitieCurrent - assetsCurrent capital gNet workin
11: Market value vs book value
The balance sheet of your firm shows current assets of $214,500 which includes cash of $23,600, accounts receivable of $87,500 and inventory of $103,400. Long-term assets have a book value of $487,300 which is comprised of a building and some equipment.
You believe you can sell the inventory for $163,900. You expect to collect only $84,600 of the accounts receivables. You can sell the equipment for $218,000 and the building for $365,000.
What is the total book value of your firm? The total market value?
12: Market value vs book value
Book Value Market Value
Current assets $214,500 $272,100
Long-term assets
$487,300 $583,000
Total assets $701,800 $855,100
13: Understanding an income statement
MALLORY, INC.2005 Income Statement
($ in millions)Net sales $2,179Cost of goods sold 1,806Depreciation 139Earnings before interest and taxes ???Interest paid 48Earnings before taxes ???Taxes 63 Net income $ ???
Dividends paid $ 50Addition to retained earnings $???
Can you find the missing values?
14: Understanding an income statement
MALLORY, INC.2005 Income Statement
($ in millions)Net sales $2,179
Cost of goods sold 1,806
Depreciation 139Earnings before interest and taxes 234Interest paid 48Earnings before taxes 186
Taxes 63 Net income $ 123
Dividends paid $50Addition to retained earnings $73
Calculations shown on next slide
15: Understanding an income statement
$73m
$50m - $123m
Dividends - incomeNet earnings retained oAddition t
$123m
$63m - $186m
Taxes - taxesbefore Earnings incomeNet
$186m
$48m - $234m
paidInterest - taxesandinterest before Earnings taxesbefore Earnings
$234m
$139m - $1,806m - $2,179m
onDepreciati - sold goods ofCost - salesNet taxesandinterest before Earnings
16: Understanding an income statement
FISCHER, INC.2005 Income Statement
($ in millions)
Net sales $1,067Cost of goods sold 731Depreciation 64 Earnings before interest and taxes ???Interest paid 32 Earnings before taxes ???Taxes ???Net income $ ???
Dividends paid $ 35Addition to retained earnings $ 121
Can you find the missing values?
17: Understanding an income statement
FISCHER, INC.2005 Income Statement
($ in millions)Net sales $1,067Cost of goods sold 731 Depreciation 64Earnings before interest and taxes 272Interest paid 32Earnings before taxes 240Taxes – 35% 84Net income $ 156
Dividends paid $ 35Addition to retained earnings $121
18: Understanding an income statement
$272
$32 $240
paidInterest taxesbefore Earnings taxesandinterest before Earnings
240$65.
156$35.1
156$rateTax - 1
incomeNet taxesbefore Earnings
$156
$121 $35
earnings retained oAddition t paid Dividends incomeNet
19: Earnings per share
Your firm has net income of $210,000. You own 140,000 shares of stock and are the only stockholder.
What is the amount of your earnings per share?
20: Earnings per share
501$
000140
000210$
goutstandin shares ofNumber
incomeNet shareper Earnings
.
,
,
21: Dividends per share
Your firm has net income of $210,000. The number of outstanding shares of common stock is 140,000. The dividend payout ratio is 40%.
What is the amount of the dividends per share?
22: Dividends per share
60.0$
000,140
000,84$
000140
40000210$
goutstandin shares ofNumber
ratiopayout Dividend incomeNet shareper Dividends
,
.,
23: Average tax rate
Given this tax table, what is the average tax rate for a firm with taxable income of $160,000?
Taxable Income Tax Rate
0- 50,000 15%
50,001- 75,000 25%
75,001- 100,000 34%
100,001- 335,000 39%
24: Average tax rate
Taxable Income Tax Rate
0- 50,000 15%
50,001- 75,000 25%
75,001- 100,000 34%
100,001- 335,000 39%
$45,650 tax Total
400,23$39.)000,100$000,160($
500,8 $34.000,25$
250,6 $25.000,25$
500,7 $15.000,50$
%53.28
2853125.
000,160$
650,45$income Taxable
taxTotal rate tax Average
25: Marginal tax rate
Taxable Income Tax Rate
0- 50,000 15%
50,001- 75,000 25%
75,001- 100,000 34%
100,001- 335,000 39%
Given the information below, what is the marginal tax rate if a firm has taxable income of $160,000?
26: Marginal tax rate
The marginal tax rate for a firm with taxable income of $160,000 is 39%. The marginal tax rate is the rate that applies to the next dollar of taxable income earned.
Taxable Income Tax Rate
0- 50,000 15%
50,001- 75,000 25%
75,001- 100,000 34%
100,001- 335,000 39%
27: Operating cash flow
Your firm has sales of $231,800, costs of goods sold of $187,000, interest expense of $3,600, depreciation expense of $11,300 and a tax rate of 34%.
What is your operating cash flow?
28: Operating cash flow
Sales $231,800COGS 187,000Depreciation 11,300EBIT 33,500Interest 3,600EBT 29,900Tax 34% 10,166 Net Income $ 19,734
166,10$34.900,29$ Tax
$34,634
10,166– 11,300 $33,500
Taxes– on Depreciati EBIT OCF
29: Net capital spending
Your firm has ending net fixed assets of $467,803 and beginning net fixed assets of $503,498. The depreciation expense for the year is $59,200.
What is the amount of your net capital spending for the year?
30: Net capital spending
$23,505
$59,200$503,498 - $467,803
onDepreciati assets fixednet Beginning - assets fixednet Ending spending capitalNet
31: Net capital spending
Net fixed assets, beginning $503,498
Less: Depreciation 59,200
Total 444,298
Plus: Net capital spending 23,505
Net fixed assets, ending $467,803
32: Net capital spending
Your firm has beginning net fixed assets of $678,407 and ending net fixed assets of $402,398. The depreciation expense for the year is $75,380.
What is the amount of the net capital spending for the year?
33: Net capital spending
$200,629-
$75,380 $678,407 - $402,398
onDepreciati assets fixednet Beginning - assets fixednet Ending spending capitalNet
34: Net capital spending
Net fixed assets, beginning $678,407
Less: Depreciation 75,380
Total 603,027
Plus: Net capital spending -200,629
Net fixed assets, ending $402,398
In this case, you had net sales of fixed assets.
35: Change in net working capital
Given the following information what is the change in net working capital (NWC)?
Beginning EndingCash $ 903 $ 789Accounts receivable 3,298 3,672 Inventory 6,129 5,032 Net fixed assets 11,973 12,530 Accounts payable 1,542 1, 303 Long-term debt 10,200 9,300
36: Change in net working capital
-$598
$8,788- $8,190
NWC Beginning - NWC Ending NWCin Change
$8,788
$1,542-$6,129$3,298 $903
sliabilitiecurrent Beginnng - assetscurrent Beginning NWC Beginning
$8,190
$1,303-$5,032$3,672$789
sliabilitiecurrent Ending - assetscurrent Ending NWC Ending
37: Cash flow from assets
A firm has operating cash flow of $18,500, change in net working capital of $300 and additions to net capital spending of -$1,200.
What is the amount of the cash flow from assets?
38: Cash flow from assets
$19,400
$300- (-$1,200) - $18,500
capital gnet workinin Change - spending capitalNet - flowcash Operating assets from flowCash
39: Cash flow to creditors
40: Cash flow to creditors
Your firm has long-term debt of $42,900 as of year end. Your beginning long-term debt was $38,900. During the year, the company paid a total of $3,500 in interest.
What is the amount your cash flow to creditors?
41: Cash flow to creditors
-$500
$38,900)-($42,900 - $3,500
debt) term-long Beginning-debt term-long (Ending - paidInterest
borrowing newNet - paidInterest creditors toflowCash
42: Cash flow to stockholders
43: Cash flow to stockholders
Your firm has a net income of $136,800 for the year. The dividend payout ratio is 50%. The balance sheet shows an ending common stock balance of $800,000 and an ending paid in surplus balance of $400,000. The beginning common stock balance is $750,000 and the beginning paid in surplus balance is $350,000.
What is the amount of your cash flow to stockholders?
44: Cash flow to stockholders
400,68$.50 $136,800 paid Dividends
-$31,600
$350,000)-$750,000-$400,000($800,000 - $68,400
surplus)in paid stock (Common -surplus)in paid stock (Common - Dividends
equity newNet - Dividends CFS
BeginEnd
Chapter
McGraw-Hill/Irwin Copyright © 2006 by The McGraw-Hill Companies, Inc. All rights reserved.
2
•End of Chapter 2•End of Chapter 2