Chaper-01
discussion
> 2 million; operating costs (excluding depreciation) were equal to 85% of sales; net fixed assets were 0
million; depreciation amounted to 10% of net fixed assets; interest expenses were million; the state-plus-federal corporate tax rate was 25%; and it paid of its net income out in dividends. Given this information, construct its income statement. Also calculate total dividends and the addition to retained earnings. Report all dollar figures in millions.
Revenue
$880 $300 $22 40% 2020 (Millions of dollars) DA
million of new common stock in the most recent year. Using this information and the results from part a, fill in the missing values for common stock, retained earnings, total common equity, and total liabilities and equity.
$36 (Millions of dollars) $300 $60 $30 $700 2020Build a Model
Build a Model
11/26/18
Chapter:
Problem:
20
a. Britton String Corp. manufactures specialty strings for musical instruments and tennis racquets. Its most recent sales were
$880
$30
$22
40%
The input information required for the problem is outlined in the “Key Input Data” section below. Using this data and the balance sheet above, we constructed the income statement shown below.
Key Input Data for Britton String Corp.
2020
(Millions of dollars)
Sales
Expenses (excluding depreciation) as a percent of sales
85.0%
Net fixed assets
Depr. as a % of net fixed assets
10.0%
Tax rate
25.0%
Interest expense
Dividend Payout Ratio
Britton String Corp.: Income Statement
Sales
Operating costs excluding depreciation
EBIT
Depreciation (Cumberland has no amortization charges)
EBIT
Interest expense
EBT
Taxes (25%)
Net income
Common dividends
Addition to retained earnings
b. Britton String’s partial balance sheets follow. Britton issued
$36
Dollar value of common stock issued (in millions of dollars)
Britton String Corp: December 31 Balance Sheets
2020
2019
Assets
Cash and cash equivalents
$70
$60
Short-term investments
$46
$42
Accounts Receivable
$120
$140
Inventories
$264
$196
Total current assets
$500
$438
Net fixed assets
$262
Total assets
$800
$700
Liabilities and equity
Accounts payable
$73
$64
Accruals
$49
Notes payable
$39
Total current liabilities
$152
$163
Long-term debt
$217
$178
Total liabilities
$369
$341
Common stock
$249
Retained earnings
$110
Total common equity
$359
Total liabilities and equity
Always check for balancing (these should be zero):
$800.0000
$0.0000
c. Construct the statement of cash flows for the most recent year.
Statement of Cash Flows
(in thousands of dollars)
Operating Activities
Net Income
Adjustments:
Noncash adjustment:
Depreciation
Due to changes in working capital:
Due to change in accounts receivable
Kenneth D. Jackson: An increase in accounts receivable from the pevious year to the current year reduces the net cash provided by operating activities
Due to change in inventories
Kenneth D. Jackson: An increase in Inventory from the previous year to the current year reduces the net cash provided by operation activities
Due to change in accounts payable
Mike Ehrhardt: An increase in accounts payable increases cash flow.
Due to change in accruals
Mike Ehrhardt: An increase in accruals is a positive cash flow.
Net cash provided (used) by operating activities
Investing Activities
Cash used to acquire gross fixed assets
Christopher Buzzard: Remember, to calculate cash used to acquire fixed assets, we must include depreciation, i.e., assets purchased are equal to the increase in net assets plus depreciation.
Due to change in short-term investments
Mike Ehrhardt: Selling securities is a positive cash flow, buying securities is a negative cash flow.
Net cash provided (used) by investing activities
Financing Activities
Due to change in notes payable
Mike Ehrhardt: An increase in debt is a positive cash flow.
Due to change in long-term debt
Mike Ehrhardt: An increase in debt is a positive cash flow.
Due to change in common stock
Mike Ehrhardt: An increase in common stock is a positive cash flow.
Payment of common dividends
Net cash provided (used) by financing activities
Net increase/decrease in cash
Add: Cash balance at the beginning of the year
Cash balance at the end of the year
Check: cash balance in statement of cash flows should equal the cash on balance sheets; this value should be zero:
$70.000