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 banks 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.
