Concept explainers
Use the following information for Taco Swell, Inc., for Problems 25 and 26 (assume the tax rate is 34 percent):
2014 | 2015 | |
Sales | $12,730 | $ 14,229 |
1,827 | 1,910 | |
Cost of goods sold | 4,377 | 5,178 |
Other expenses | 1,041 | 906 |
Interest | 854 | 1,019 |
Cash | 6,674 | 7,113 |
Accounts receivable | 8,837 | 10,371 |
Short-term notes payable | 1,288 | 1,262 |
Long-term debt | 22,352 | 27,099 |
Net fixed assets | 55,977 | 59,700 |
Accounts payable | 4,822 | 5,108 |
Inventory | 15,711 | 16,817 |
Dividends | 1,522 | 1,780 |
26. Calculating Cash Flow [LO4] For 2015, calculate the cash flow from assets, cash flow to creditors, and cash flow to stockholders.
To calculate: The cash flow from assets, the cash flow to creditors, and the cash flow to stockholders for the year 2015.
Introduction:
The cash flow refers to the difference between the money that comes in and goes out of the firm. The cash flow from assets refers to the difference between the revenues from the sale of assets and the money invested in purchasing the assets.
The cash flow to the creditors refers to the interest paid to the creditors minus the net fresh debt borrowed by the company. The cash flow to the stockholders refers to the dividend paid to the shareholders of the company minus the fresh equity raised by the company.
Answer to Problem 26QP
The cash flow from assets for the year 2015 is ($2,080.44). The cash flow to creditors for the year 2015 is ($3,728). The cash flow to stockholders’ for the year 2015 is $1,647.56.
Explanation of Solution
Given information:
Company T | ||
Particulars | 2014 | 2015 |
Sales | $12,730 | $14,229 |
Cost of goods sold | $4,377 | $5,178 |
Other expenses | $1,041 | $906 |
Depreciation | $1,827 | $1,910 |
Interest | $854 | $1,019 |
Dividends | $1,522 | $1,780 |
Cash | $6,674 | $7,113 |
Accounts receivable | $8,837 | $10,371 |
Inventory | $15,711 | $16,817 |
Net fixed assets | $55,977 | $59,700 |
Accounts payable | $4,822 | $5,108 |
Short-term notes payable | $1,288 | $1,262 |
Long-term debt | $22,352 | $27,099 |
Income statement for the year 2014 and 2015 based on the given information:
Company T | ||||
Income statement | ||||
Particulars | 2014 | 2015 | ||
Net sales | $12,730.00 | $14,229.00 | ||
Less: | ||||
Costs | $4,377.00 | $5,178.00 | ||
Other expenses | $1,041.00 | $906.00 | ||
Depreciation | $1,827.00 | $7,245.00 | $1,910.00 | $7,994.00 |
Earnings before interest and taxes | $5,485.00 | $6,235.00 | ||
Less: Interest paid | $854.00 | $1,019.00 | ||
Taxable income | $4,631.00 | $5,216.00 | ||
Less: Taxes ($4,631×34%) | $1,574.54 | $1,773.44 | ||
Net income (A) | $3,056.46 | $3,442.56 | ||
Dividends (B) | $1,522.00 | $1,780.00 | ||
Addition to retained earnings (A)−(B) | $1,534.46 | $1,662.56 |
Balance sheets for the year 2014 and 2015 based on the given information:
Prepare the balance sheet for 2014:
Company T | |||
Balance sheet | |||
For the year 2014 | |||
Assets | Amount | Liabilities | Amount |
Current assets: | Current liabilities: | ||
Cash | $6,674.00 | Accounts payable | $4,822.00 |
Accounts receivable | $8,837.00 | Short-term notes payable | $1,288.00 |
Inventory | $15,711.00 | Total | $6,110.00 |
Total (A) | $31,222.00 | ||
Long-term debt | $22,352.00 | ||
Tangible net fixed assets (B) | $55,977.00 | Shareholders' equity: | |
Common stock (Balance) | $57,202.54 | ||
Retained earnings | $1,534.46 | ||
Total | $58,737.00 | ||
Total assets (A)+(B) | $87,199.00 | Total liabilities and shareholders' equity | $87,199.00 |
Hence, the total assets of Company T is 2014 is $87,199.
Compute the common stock for 2014:
Hence, the common stock of Company T for 2014 is $57,202.54.
Prepare the balance sheet for 2015:
Company T | |||
Balance sheet | |||
For the year 2015 | |||
Assets | Amount | Liabilities | Amount |
Current assets: | Current liabilities: | ||
Cash | $7,113.00 | Accounts payable | $5,108.00 |
Accounts receivable | $10,371.00 | Short-term notes payable | $1,262.00 |
Inventory | $16,817.00 | Total | $6,370.00 |
Total (A) | $34,301.00 | ||
Long-term debt | $27,099.00 | ||
Tangible net fixed assets (B) | $59,700.00 | Shareholders' equity: | |
Common stock (Balance) | $57,334.98 | ||
Retained earnings | $3,197.02 | ||
Total | $60,532.00 | ||
Total assets (A)+(B) | $94,001.00 | Total liabilities and shareholders' equity | $94,001.00 |
Hence, the total assets of Company T is 2015 is $94,001.
Compute the retained earnings for 2015:
Hence, the retained earnings of Company T for 2015 are $3,197.02.
Compute the common stock for 2015:
Hence, the common stock of Company T for 2014 is $57,334.98.
Formulae:
The formula to calculate the net new borrowing and the cash flow to creditors:
The formula to calculate the new equity raised and the cash flow to stockholders:
The formula to calculate the cash flow from assets:
Compute the net new borrowing at the end of 2015:
The long-term debt in the balance sheet of Company T in 2014 was $22,352. The company had long-term debt worth $27,099 in 2015.
Hence, the net new borrowing is $4,747.
Compute the cash flow to creditors in 2015:
The interest expense of Company T in 2015 was $1,019.
Hence, the cash flow to creditors is ($3,728).
Compute the net new equity raised in 2015:
The common equity in 2014 is 57,202.54 (Refer to the balance sheet of 2014 in the solution) and the common equity in 2015 is $57,334.98 (Refer to the balance sheet of 2015 in the solution).
Hence, the net new equity raised is $132.44.
Compute the cash flow to stockholders’ in 2015:
The company paid $1,780 as dividends in the year 2015.
Hence, the cash flow to stockholders’ is $1,647.56.
Compute the cash flow from assets:
Hence, the cash flow from assets is ($2,080.44).
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Chapter 2 Solutions
Fundamentals of Corporate Finance
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