Chapter 2: Accounting Statements and Cash Flow

Chapter 2: Accounting Statements and Cash Flow

2.1

Assets
Current assets
Cash / $ 4,000
Accounts receivable / 8,000
Total current assets / $ 12,000
Fixed assets
Machinery / $ 34,000
Patents / 82,000
Total fixed assets / $116,000
Total assets / $128,000
Liabilities and equity
Current liabilities
Accounts payable / $ 6,000
Taxes payable / 2,000
Total current liabilities / $ 8,000
Long-term liabilities
Bonds payable / $7,000
Stockholders equity
Common stock ($100 par) / $ 88,000
Capital surplus / 19,000
Retained earnings / 6,000
Total stockholders equity / $113,000
Total liabilities and equity / $128,000

2.2

One year ago / Today
Long-term debt / $50,000,000 / $50,000,000
Preferred stock / 30,000,000 / 30,000,000
Common stock / 100,000,000 / 110,000,000
Retained earnings / 20,000,000 / 22,000,000
Total / $200,000,000 / $212,000,000

2.3

Income Statement
Total operating revenues / $500,000
Less: Cost of goods sold / $200,000
Administrative expenses / 100,000 / 300,000
Earnings before interest and taxes / $200,000
Less: Interest expense / 50,000
Earnings before Taxes / $150,000
Taxes / 51,000
Net income / $99,000

2.4

a.

Income Statement
The Flying Lion Corporation
19X1 / 19X2
Net sales / $800,000 / $500,000
Cost of goods sold / (560,000) / (320,000)
Operating expenses / (75,000) / (56,000)
Depreciation / (300,000) / (200,000)
Earnings before taxes / $(135,000) / $(76,000)
Taxes* / 40,500 / 22,800
Net income / $(94,500) / $(53,200)

* The problem states that Flying Lion has other profitable operations. Flying Lion can take advantage of tax losses by deducting the tax liabilities in the other operations that have taxable profits. If Flying Lion did not have other operations and tax losses could not be carried forward or backward, then taxes in each of these years would have been zero.

b. Cash flow during 19X2 = -$94,500 + $300,000 = $205,500

Cash flow during 19X1 = -$53,200 + $200,000 = $146,800

2.5 The main difference between accounting profit and cash flow is that non-cash costs, such as depreciation expense, are included in accounting profits. Cash flows do not consider costs that do not represent actual expenditures. Cash flows deduct the entire cost of an investment at the time the cash flow occurs.

2.6 a. Net operating income = Sales - Cost of goods sold - Selling expenses - Depreciation

= $1,000,000 - $300,000 - $200,000 - $100,000

= $400,000

b. Earnings before taxes = Net operating income - Interest expense

= $400,000 - 0.1 ($1,000,000)

= $300,000

c. Net income = Earnings before taxes - Taxes

= $300,000 - 0.35 ($300,000)

= $195,000

d. Cash flow = Net income + Depreciation + Interest expense

= $195,000 + $100,000 + $100,000

= $395,000

2.7

Statement of Cash Flows
The Stancil Company
Cash flows from the firm
Capital spending / $(1,000)
Additions to working capital / (4,000)
Total / $(5,000)
Cash flows to investors of the firm
Short-term debt / $(6,000)
Long-term debt / (20,000)
Equity (Dividend - Financing) / 21,000
Total / $(5,000)

2.8 a. The changes in net working capital can be computed from:

Sources of net working capital
Net income / $100
Depreciation / 50
Increases in long-term debt / 75
Total sources / $225
Uses of net working capital
Dividends / $50
Increases in fixed assets* / 150
Total uses / $200
Additions to net working capital / $25

*Includes $50 of depreciation.

b.

Cash flow from the firm
Operating cash flow / $150
Capital spending / (150)
Additions to net working capital / (25)
Total / $(25)
Cash flow to the investors
Debt / $(75)
Equity / 50
Total / $(25)

3

Answers to End-of-Chapter Problems