Chapter 3 Cash Flow and Financial Planning

 
1. Darling Paper Container, Inc. purchased
several machines at a total cost of $300,000. The installation cost for this
equipment was $25,000. The firm plans to depreciate the equipment using the
MACRS 5?year normal recovery period. Prepare a depreciation schedule showing
the depreciation expense for each year.

2. Given
the financial data for New Electronic World, Inc. (NEW), compute the following
measures of cash flows for the NEW for the year ended December 31, 2005
(a) Operating
Cash Flow.
(b) Free Cash Flow.

For the year
ended December 31,

2004

2005

Depreciation

$ 3,000

EBIT

30,000

Interest Expenses

3,000

Taxes

8,000

Cash

$21,000

24,000

Accounts Receivable

39,000

45,000

Inventory

27,000

30,000

Net fixed assets

22,000

24,000

Accounts payable

25,000

30,000

Notes payable

50,000

40,000

Accruals

1,000

2,000

3. Identify
each expense or revenue as a cash flow from operating activities (O), a cash
flow from investment activities (I), or a cash flow from financing activities
(F).
Administrative expenses
Rent payment
Interest on a note payable
Interest on a note receivable
Sale of equipment
Dividend payment
Stock repurchase
Sale of finished goods
Labor expense
Sale of a bond issue
Repayment of a long?term debt
Selling expenses
Depreciation expense
Sale of common stock
Purchase of fixed assets

4. Calculate the change in the key balance
sheet accounts between 2002 and 2003 and classify each as a source (S), a use
(U), or neither (N), and indicate which type of cash flow it is: an operating
cash flow (O), and investment cash flow (I) or a financing cash flow (F).

ABC Corp.
Balance Sheet Changes and Classification
of Key Accounts between 2004 and 2005

Account

2004

2005

Change

Classification

Type

Long?term debts

$ 960

$ 800

Accounts receivable

640

500

Common stock

200

200

Cash

640

500

Retained earnings

960

800

Accruals

50

200

Inventory

840

600

Accounts payable

1,150

1,000

Net fixed assets

1,800

2,000

Table
3.5

Magna Fax,
Inc.
Income Statement
For the Year Ended December 31, 2005

Sales revenue

$150,000

Cost of goods sold

.png”>117,500

Gross Profits

$32,500

?Selling expense

4,500

?General and administrative expense

4,000

?Depreciation expense

.png”>4,000

Operating profits

$ 20,000

Interest expense

2,500

Net profit before taxes

.png”>$ 17,500

Taxes (40%)

7,000

Net profit after taxes

.png”>$ 10,500

Magna Fax,
Inc.
Balance Sheet
For the Years Ended December 31, 2004 and 2005

2004

2005

Assets
Cash

$24,000

$21,000

Accounts receivable

45,000

39,000

Inventory

30,000

27,000

?Gross fixed assets

$42,000

$40,000

?Acc. Depreciation

.png”>22,000

.png”>18,000

Net fixed assets

.png”>20,000

.png”>22,000

Total assets

$119,000

$109,000

Liabilities and Equity

Accounts payable

$25,000

$30,000

Notes payable

50,000

40,000

Accruals

1,000

2,000

Long?term debts

10,000

8,000

Common stock at par

1,000

1,000

Paid?in capital in excess of par

4,000

4,000

Retained earnings

28,000

24,000

Total liabilities and equity

$119,000

$109,000

5. The
credit manager at First National Bank has just received the income statement
and balance sheet for Magna Fax, Inc. for the year ended December 31,2005. (See
Table 3.5.) The bank requires the firm to report its earnings performance and
financial position quarterly as a condition of a loan agreement. The bank’s
credit manager must prepare two key financial statements based on the
information sent by Magna Fax, Inc. This will be passed on to the commercial
loan officer assigned to this account, so that he may review the financial
condition of the firm.
(a) Prepare a statement of retained
earnings for the year ended December 31, 2005.
(b) Prepare
a summary of cash inflows and cash outflows for the year ended December 31,
2005.
(c) Prepare a statement of cash flows
for the year ended December 31, 2005, organized by cash flow from operating
activities, cash flow from investment activities, and cash flow from financing
activities.

6. Gerry
Jacobs, a financial analyst for Best Valu Supermarkets, has prepared the
following sales and cash disbursement estimates for the period August through
December of the current year.

Month

Sales

Cash
Disbursements

August

$400

$300

September

500

500

October

500

700

November

600

400

December

700

500

90 percent of sales
are for cash, the remaining 10 percent are collected one month later. All
disbursements are on a cash basis. The firm wishes to maintain a minimum cash
balance of $50. The beginning cash balance in September is $25. Prepare a cash
budget for the months of October, November, and December, noting any needed
financing or excess cash available.