c HA
uu
2
Financial Statements, Thxes, andCashFlow
ffi cormect' 8:ff:it"8i:ffi ffiJlilffi #ffi1;Y;xJ,
QUE$TIONS AND PROBLEMS
lFlNAilcE section of tho preface for more lnformaflon,
l. Building a Balance Sheet. Kroeger, Inc., has culrent assets of $1,970, net fixed Basic
assets of $9,650, current liabilities of $ 1,520, and long-term debt of $4,370. What is
(Questions 1-1 3)
the value of the shareholders' equity account for this firm? How much is net working
capital?
m
2. Building an lncome $tatement. Draiman, Inc., has
sales of $795,000, costs of
$345,000, depreciation expense of $76,000, interest expense of $41,000, and a tax
rate of 35 percent. What is the net income for this firm?
@
@
3. Dividends and Retained Earnings.
Suppose the firm in Problem 2 paid out
$56,000 in cash dividends. What is the addirion to retained earnings?
4. Penshare Earnings and Dividends, suppose the firm in Problem 3 had 60,000
shares of common stock outstanding. What is the earnings per share, or EPS, figure?
What is the dividends per share figure?
TM
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@
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5. Market Values and Book Values. Klingon Widgets, Inc., purchased new
cloaking machinery three years ago for $B million. The machinery can be sold to the
Romulans today for $6.7 million. Klingon's cuffent balance sheet shows net fixed
assets of $3.1 million, current liabilities of $790,000, and net working capital of
$145,000. If all the curent assets were liquidated today, the company would receive
$865,000 cash. What is the book value of Klingon's total assets today? What is the
market value?
6. Galculating Taxes. The SGS Co. had $215,000 in taxable income. Using the
rates from Trible 2.3 in the chapter, calculate the company's income taxes.
7. Tax
Rates' In Problem 6, what is the average
tax rate? What is the marginal tax
rate?
8. Calculating OCF, Hammett, Inc., has sales of $34,630, costs of $10,340,
depreciation expense of $2,520, and interest expense of $1,750. If the tax rate is
35 percent, what is the operating cash flow, or OCF?
9. Calculating Net Gapital Spending. Rotweiler Obedience School's December 31,
2013, balance sheet showed net fixed assets of $ 1,635,000, and the December 3 1 ,
2Ul4,balance sheet showed nel fixed assets of 91,976,000. The company'sZ0l4
income statement showed a depreciation expense of $305,000. What was Rotweiler's
net capital spending for 2014?
I O. Calculating Additions to NWC. The Decemb er 31, 2013, balance sheet of
Maria's Tennis Shop, Inc., showed current assets of $1,045 and current liabilities of
$960. The December 3t,2014, balance sheet showed current assets of $1,310 and
cuffent liabilities of $ 1 ,090. what was the company's 2014 change in net working
capital, or NWC?
I
'1. Gash Flow to credltors. The December 31,2013, balance sheet of Schism, Inc.,
showed long-term debt of $1,280,000, and the December 3I,Z}L4,balance sheet
showed long-term debt of $1,410,000. The 2014 income statement showed an interest
expense of $93,400. What was the frm's cash flow to creditors d:unng2}l4?
12. Cash Flow to $tockholders. The December 31, 2013, balance sheet of Schism,
Inc., showed $120,000 in the common stock account and $2,120,000 in the additional
paid-in surplus account. The December 31,20t4, balance sheet showed $135,000
and $2,380,000 in the same two accounts, respectively. If the company paid out
$135,000 in cash dividends during 2}l4,whatwas the cash flow to stockholders for
the year?
45
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Understanding Financial Statements and Cash Flow
13" Calculating Gash
Flows.
Given the information for Schism, Inc., in Problems
11 and 12, suppose you also know that the firm's net capital spending for 2014 was
$640,000, and that the firm reduced its net working capital investment by $105,000.
What was the firm's 2014 operating cash flow, or OCF?
lntermediate
(Questions 14*23)
14, Calculating Cash Flows. Weiland Co. shows the following information on
its 2014 income statement: sales = $167,000; costs : $88,600; otler expenses :
$4,900; depreciation expense = $11,600; interestexpense : $8,7ff)i t&xes = $18,620;
dividends : $9,700.In addition, you're told that the firm issued $2,900 in new equity
during 20!4, andredeemed $4,000 in outstanding long-term debt.
a. What is the2014 operating cash flow?
b. What is the2014 cash flow to creditors?
c. What is uhe 2Al4 cash flow to stockholders?
d. If net fixed assets increased by $23,140 during the year, what was the addition to
NWC?
15. Using tncome Statements. Given the following intbrmation for Sookie's
Cookies Co., calculate the depreciation expense: sales
addition l.o retained earnings
$2,600: dividends paid
rate
percent.
tax
$1,670;
40
:
:
: $55.0001 costs : $43,200;
: $1.150; interest expense =
16, Preparing a Balance Sheet. Prepare a balance sheel for Alaskiur Orange Corp.
as of December 31,2014, based on the following information: cash = $197,000;
:
:
patents and copyrights
$863,000; accounts payable
$288,000; accounrs
receivable $265,000: tangible net fixed assets $5,300.000; invenrory
$563,000; notes payable
$194,000; accumulaled retained eamings
$4.586,000;
:
long-term debt
:
=
:
:
:
$1,450,000.
17. Residual Claims. Chevelle, Inc., is obligated to pay irs creditors $7,800 during
the year.
a.
b.
What is the value of the shareholders' equity
What if assets equal $6,900?
if
assets equal $9,300?
18, Marginal versus Average Tax Rates. (Refer to Table 2.3.) Corporation Growth
has $83,000 in taxable income, and Corporation Income has $8,300,000 in taxable
income.
a.
b.
fr,
What is the tax bill for each firm?
Suppose both firms have identified a new project that will increase taxable
income by $10,000. How much in additional taxes will each flrm pay? Why is
this amount the same?
19, Net lncome and OGF. During the year, Belyk Paving Co. had sales of
$2,600,000. Cost of goods sold, administrative and selling expense.q, and depreciation
expense were $1,,535,000, $465,000, and $520,000, respectively. In addition, the
company had an interest expense of $245,000 and a tax rate of 35 percent. (Ignore
any tax loss carryback or carryforward provisions.)
a.
b.
c.
What is Belyk's net income?
What is its operating cash flow?
Explain your results in (a) and (b).
2O. Accounting Valucs versus Cash Flows. In Problem 19, suppose Belyk Paving
Co. paid out $420,000 in cash dividends. Is this possible? If net capital spending was
zero, no new investments were made in net working capital, and no new stock was
issued during the year, what do you know about the firm's long-tenn debt account?
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Financial Statements, Taxes, and Cash trlow
47
21. Galculating Cash Flows. Titan Foorball Manufacturing had the following
:
:
operating results for 2014: sales
$23,730; cost of goods sold
$16,780;
depreciation expense = $2,840; interest expense
$414; dividends paid
$616. At
the beginning of the year, net fixed assets were $16,560, current assets were fi2,940,
and cunent liabilities were $2,592. At the end of the year, net fixed assets were
$18,840, current assets were $3,528, and current liabilities were $2,484. The tax rate
for 2014 was 35 percent.
a.
b.
c.
d.
:
:
What is net income for 2014?
What is the operating cash flow for 2014'l
What is the cash flow from assets for 2014? Is this possible? Explain.
If no new debt was issued during the year, what is the cash flow to creditors?
What is the cash flow to stockholders? Explain and interpret the positive and
negative signs of your answers in (a) through (d).
22. Calculating Cash Florars, Consider the following abbreviated financial
statements for Cabo Wabo, Inc.:
oABO WABO, !NC.
Partial Balance Sheets as of December 3'1, 2013 and 2014
2013
2013
2014
CABO WABO, INC.
2014lncome Statement
2014
Liabilities and
Assets
Owners'Equity
Current assets $ 3,198 $ 3,389
Net fixed assets 14,826 15,500
a.
b.
c.
Current liabilities
Long-term debt
$1
,381
$2,030
8,086
Sales
Costs
Depreciation
lnterest paid
9,434
What is owners' equity for 2013 arrd2014?
What is the change in net working capital for 20L4?
ln20L4, Cabo Wabo purchased $8,424 in new fixed assets. How much in fixed
assets did Cabo Wabo sell? What is the cash flow from assets for the year? (The
tax rate is 40 percent.)
d.
During 2014, Cabo Wabo raised $2,535 in new long-term debt. How much longterm debt must Cabo Wbbo have paid off during the year? What is the cash flow
to crcditors?
23, Gash Flow ldentity. GraffitiAdvertising,Inc., reported the fbllowing financial
statements for the last two years. Construct the cash flow identity for the company.
Explain what each number means.
2014lncome Statement
Sales
Cost of goods sold
Selling & administrative
Depreciation
EBIT
$621,720
334,427
137,206
60,033
$
lnterest
EBT
Taxes
90,054
21,226
$
68,828
27,531
Net income
Dividends
Addition to retained earnings
$ 15,600
$ 25,697
$47,842
23,992
4,040
750
48
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Understanding Financial Statements and Cash Flow
GRAFFITI AD]/ERTISING, INC.
Balance Sheet as of December 31, 20'13
$
Cash
Accounts receivable
lnventory
Current assets
Net fixed assets
14,652
20,893
Accounts payable
Notes payable
$
10,535
15,858
15,173
Current liabilities
Long-term debt
$
26,393
$
50,718
$378,869
$150,500
$252,694
Owners'equity
Total liabilities and
Total assets
$139{92
owners'equity
$429,587
GRAFFITI ADVERTISING, INC.
Bal€nce Sheet as of December 31, 2014
$ 15,737
Cash
Accounts receivable
lnventory
Current assets
Net fixed assets
23,209
25,029
$
63,975
$446,942
Accounts payable
Notes payable
$
11,563
18,1 1 3
Current liabilities
Long-term debt
$
29,676
$167,200
$314,041
Owners'equity
Total liabilities and
Total assets
@
Challenge
(Questions 24-25)
$51q91_z
owners'equity
24, Net Fixed Assets and Depreciation. on the balance
$510,917
sheet, the net fixed assets
(NFA) account is equal to the gross fixed assets (FA) account (which records the
acquisition cost of fixed assets) minus the accumulated depreciation (AD) account
(which records the total depreciation taken by the firm against its'fixed assets). Using
the fact that NFA : FA - AD, show that the expression given in the chapter for net
capital spending, NFA -, - NFA-_ * D (where D is rhe depreciation expense during
the year), is
equiruenfit rn""u
j'Fq*.
25. Thx Rates. Refer to the corporate marginal tax rate information in Table 2.3.
b.
Why do you think the marginal tax rate jumps up from 34 percent to 39 percent
at a taxable income of $100,001, and then falls back to a 34 percent marginal
rate al a taxable income of $335,001?
Compute the average tax rate for a corporation with exactly $335,001 in taxable
income. Does this confum your explanation in part (a)? What is the average tax
rate for a corporation with exactly $18,333,334? Is the same thing happening
here?
c.
ffi
ffi
Both the 39 percent and 38 percent tax rates represent what is called a tax
"bubble." Suppose the government wanted to lower the upper threshold of the
39 percent marginal tax bracket from $335,000 to $200,000. What would the
new 39 percent bubble rate have to be?
2.1 Change in ilet Working Gapita!. Visit Alcoa
ITUHAT'$ OT{
TIIE I'UEB?
at www;alcoa.com. Find the most
recent annual report and locate the balance sheets for the past two years. Use these balance
sheets to calculate the change in net working capital. Hcm do you interpret this number?
2.2 Book Yalues vorsus Market Values. The home page for Coca-Cola Company
be fbund at www.coca-cola.com. Locate the most recent armual repofi, which contains
a balance sheet for the company. What is the book value of equity for Coca-Cola? The
T
can
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2
Financial Statements, Thxes, and Cash Flow
market value of a company is the number of shares of stock outstanding times the price
per share. This information can be found at finance.yahoo.com using the ticker symbol for
Coca-Cola (KO). What is the market value of equity? Which number is more relevanr for
shareholders?
2.3 Net Working Capital. Duke Energy is one of the world's largest energy companies.
Go to the company's home page at www.dukeenergy.com, follow ttre link to the investor's
page, and locate the annual reports. What was Duke Energy's net working capital for the
most recent year? Does this number seem low to you given Duke's curent liabilities? Does
this indicate that Duke Energy may be experiencing financial problems? Why or why not?
2.4 Cash FIows to Stockholdens and Greditors. Cooper Tire and Rubber Company
provides financial information for investors on its website at www.coopertires.com. Follow
the "lnvestors" link and find the most recent annual report. Using the consolidated statement
ofcash flows, calculate fhe cash flow to stockholders and the cash flow to creditors.
EXCEL MASTEfr
'I'
PROBLEM
Using Excel to find the marginal tax rate can be accomplished using the VLOOKUP function. However, calculating the total tax bill is a little more difficult. Below we have shown
a copy of the IRS tax table for an individual from a recent year. Often, tax tables are presented in this format.
lf taxable income
Is over.
But not
.,
over.,.
$0
7,825
$7,825
31,850
,850
77,100
77,100
160,850
160,850
349,700
31
Thetaxls:
'10% of the amount over $0
$782.50 plus 15% of the amount over $7,825
$4,386.25 plus 25% of the amount over $31 ,850
$'15,698.75 plus 28% of the amount over $77,100
$39,148.75 ptus 33% of the amount over $1 60,850
$101 ,469.25 plus 35% of the amount over $349,700
349,700
ln reading this table, the marginal tax rate for taxable income less than $7,825 is 107o. If
the taxable income is between $7,825 and $31 ,850, the tax bill is $782.50 plus the marginal
taxes. The marginal taxes are calculated as the taxable income minus $7,825 times the
marginal tax rate of l5Vo.
Below, we have the corporate tax table as shown in the textbook, as well as a taxable
income.
faxable income
is grcater than
or equal to . . .
$0
But less
fhx
than
rate
..
.
50,001
$50,000
75,000
75,001
100,001
33s,000
34
39
335,001
10,000,000
34
10,000,001
15,000,001
15,000,000
35
18,333,333
38
I
8,333,334
100,000
l5Vo
25
35
49
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Understanding Financial Statements and Cash Flow
a.
Create a tax table in Excel lor corporate taxes similar to the individual tax table
shown above. Your spreadsheet should then calculate the marginal tax rate, the
average tax rate, and the tax bill for any level of taxable income inprut by a user.
b.
c.
d.
For a taxable income of
$
1
,3-50.000. what is the marginal tax rate?
For a taxable income of $ 1.350,000, whal is the total tax bi]l?
For a taxable income of $1,350,000, what is the average tax rate'l
c HA
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2
Financial Statements, Thxes, andCashFlow
ffi cormect' 8:ff:it"8i:ffi ffiJlilffi #ffi1;Y;xJ,
QUE$TIONS AND PROBLEMS
lFlNAilcE section of tho preface for more lnformaflon,
l. Building a Balance Sheet. Kroeger, Inc., has culrent assets of $1,970, net fixed Basic
assets of $9,650, current liabilities of $ 1,520, and long-term debt of $4,370. What is
(Questions 1-1 3)
the value of the shareholders' equity account for this firm? How much is net working
capital?
m
2. Building an lncome $tatement. Draiman, Inc., has
sales of $795,000, costs of
$345,000, depreciation expense of $76,000, interest expense of $41,000, and a tax
rate of 35 percent. What is the net income for this firm?
@
@
3. Dividends and Retained Earnings.
Suppose the firm in Problem 2 paid out
$56,000 in cash dividends. What is the addirion to retained earnings?
4. Penshare Earnings and Dividends, suppose the firm in Problem 3 had 60,000
shares of common stock outstanding. What is the earnings per share, or EPS, figure?
What is the dividends per share figure?
TM
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@
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5. Market Values and Book Values. Klingon Widgets, Inc., purchased new
cloaking machinery three years ago for $B million. The machinery can be sold to the
Romulans today for $6.7 million. Klingon's cuffent balance sheet shows net fixed
assets of $3.1 million, current liabilities of $790,000, and net working capital of
$145,000. If all the curent assets were liquidated today, the company would receive
$865,000 cash. What is the book value of Klingon's total assets today? What is the
market value?
6. Galculating Taxes. The SGS Co. had $215,000 in taxable income. Using the
rates from Trible 2.3 in the chapter, calculate the company's income taxes.
7. Tax
Rates' In Problem 6, what is the average
tax rate? What is the marginal tax
rate?
8. Calculating OCF, Hammett, Inc., has sales of $34,630, costs of $10,340,
depreciation expense of $2,520, and interest expense of $1,750. If the tax rate is
35 percent, what is the operating cash flow, or OCF?
9. Calculating Net Gapital Spending. Rotweiler Obedience School's December 31,
2013, balance sheet showed net fixed assets of $ 1,635,000, and the December 3 1 ,
2Ul4,balance sheet showed nel fixed assets of 91,976,000. The company'sZ0l4
income statement showed a depreciation expense of $305,000. What was Rotweiler's
net capital spending for 2014?
I O. Calculating Additions to NWC. The Decemb er 31, 2013, balance sheet of
Maria's Tennis Shop, Inc., showed current assets of $1,045 and current liabilities of
$960. The December 3t,2014, balance sheet showed current assets of $1,310 and
cuffent liabilities of $ 1 ,090. what was the company's 2014 change in net working
capital, or NWC?
I
'1. Gash Flow to credltors. The December 31,2013, balance sheet of Schism, Inc.,
showed long-term debt of $1,280,000, and the December 3I,Z}L4,balance sheet
showed long-term debt of $1,410,000. The 2014 income statement showed an interest
expense of $93,400. What was the frm's cash flow to creditors d:unng2}l4?
12. Cash Flow to $tockholders. The December 31, 2013, balance sheet of Schism,
Inc., showed $120,000 in the common stock account and $2,120,000 in the additional
paid-in surplus account. The December 31,20t4, balance sheet showed $135,000
and $2,380,000 in the same two accounts, respectively. If the company paid out
$135,000 in cash dividends during 2}l4,whatwas the cash flow to stockholders for
the year?
45
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Understanding Financial Statements and Cash Flow
13" Calculating Gash
Flows.
Given the information for Schism, Inc., in Problems
11 and 12, suppose you also know that the firm's net capital spending for 2014 was
$640,000, and that the firm reduced its net working capital investment by $105,000.
What was the firm's 2014 operating cash flow, or OCF?
lntermediate
(Questions 14*23)
14, Calculating Cash Flows. Weiland Co. shows the following information on
its 2014 income statement: sales = $167,000; costs : $88,600; otler expenses :
$4,900; depreciation expense = $11,600; interestexpense : $8,7ff)i t&xes = $18,620;
dividends : $9,700.In addition, you're told that the firm issued $2,900 in new equity
during 20!4, andredeemed $4,000 in outstanding long-term debt.
a. What is the2014 operating cash flow?
b. What is the2014 cash flow to creditors?
c. What is uhe 2Al4 cash flow to stockholders?
d. If net fixed assets increased by $23,140 during the year, what was the addition to
NWC?
15. Using tncome Statements. Given the following intbrmation for Sookie's
Cookies Co., calculate the depreciation expense: sales
addition l.o retained earnings
$2,600: dividends paid
rate
percent.
tax
$1,670;
40
:
:
: $55.0001 costs : $43,200;
: $1.150; interest expense =
16, Preparing a Balance Sheet. Prepare a balance sheel for Alaskiur Orange Corp.
as of December 31,2014, based on the following information: cash = $197,000;
:
:
patents and copyrights
$863,000; accounts payable
$288,000; accounrs
receivable $265,000: tangible net fixed assets $5,300.000; invenrory
$563,000; notes payable
$194,000; accumulaled retained eamings
$4.586,000;
:
long-term debt
:
=
:
:
:
$1,450,000.
17. Residual Claims. Chevelle, Inc., is obligated to pay irs creditors $7,800 during
the year.
a.
b.
What is the value of the shareholders' equity
What if assets equal $6,900?
if
assets equal $9,300?
18, Marginal versus Average Tax Rates. (Refer to Table 2.3.) Corporation Growth
has $83,000 in taxable income, and Corporation Income has $8,300,000 in taxable
income.
a.
b.
fr,
What is the tax bill for each firm?
Suppose both firms have identified a new project that will increase taxable
income by $10,000. How much in additional taxes will each flrm pay? Why is
this amount the same?
19, Net lncome and OGF. During the year, Belyk Paving Co. had sales of
$2,600,000. Cost of goods sold, administrative and selling expense.q, and depreciation
expense were $1,,535,000, $465,000, and $520,000, respectively. In addition, the
company had an interest expense of $245,000 and a tax rate of 35 percent. (Ignore
any tax loss carryback or carryforward provisions.)
a.
b.
c.
What is Belyk's net income?
What is its operating cash flow?
Explain your results in (a) and (b).
2O. Accounting Valucs versus Cash Flows. In Problem 19, suppose Belyk Paving
Co. paid out $420,000 in cash dividends. Is this possible? If net capital spending was
zero, no new investments were made in net working capital, and no new stock was
issued during the year, what do you know about the firm's long-tenn debt account?
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Financial Statements, Taxes, and Cash trlow
47
21. Galculating Cash Flows. Titan Foorball Manufacturing had the following
:
:
operating results for 2014: sales
$23,730; cost of goods sold
$16,780;
depreciation expense = $2,840; interest expense
$414; dividends paid
$616. At
the beginning of the year, net fixed assets were $16,560, current assets were fi2,940,
and cunent liabilities were $2,592. At the end of the year, net fixed assets were
$18,840, current assets were $3,528, and current liabilities were $2,484. The tax rate
for 2014 was 35 percent.
a.
b.
c.
d.
:
:
What is net income for 2014?
What is the operating cash flow for 2014'l
What is the cash flow from assets for 2014? Is this possible? Explain.
If no new debt was issued during the year, what is the cash flow to creditors?
What is the cash flow to stockholders? Explain and interpret the positive and
negative signs of your answers in (a) through (d).
22. Calculating Cash Florars, Consider the following abbreviated financial
statements for Cabo Wabo, Inc.:
oABO WABO, !NC.
Partial Balance Sheets as of December 3'1, 2013 and 2014
2013
2013
2014
CABO WABO, INC.
2014lncome Statement
2014
Liabilities and
Assets
Owners'Equity
Current assets $ 3,198 $ 3,389
Net fixed assets 14,826 15,500
a.
b.
c.
Current liabilities
Long-term debt
$1
,381
$2,030
8,086
Sales
Costs
Depreciation
lnterest paid
9,434
What is owners' equity for 2013 arrd2014?
What is the change in net working capital for 20L4?
ln20L4, Cabo Wabo purchased $8,424 in new fixed assets. How much in fixed
assets did Cabo Wabo sell? What is the cash flow from assets for the year? (The
tax rate is 40 percent.)
d.
During 2014, Cabo Wabo raised $2,535 in new long-term debt. How much longterm debt must Cabo Wbbo have paid off during the year? What is the cash flow
to crcditors?
23, Gash Flow ldentity. GraffitiAdvertising,Inc., reported the fbllowing financial
statements for the last two years. Construct the cash flow identity for the company.
Explain what each number means.
2014lncome Statement
Sales
Cost of goods sold
Selling & administrative
Depreciation
EBIT
$621,720
334,427
137,206
60,033
$
lnterest
EBT
Taxes
90,054
21,226
$
68,828
27,531
Net income
Dividends
Addition to retained earnings
$ 15,600
$ 25,697
$47,842
23,992
4,040
750
48
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Understanding Financial Statements and Cash Flow
GRAFFITI AD]/ERTISING, INC.
Balance Sheet as of December 31, 20'13
$
Cash
Accounts receivable
lnventory
Current assets
Net fixed assets
14,652
20,893
Accounts payable
Notes payable
$
10,535
15,858
15,173
Current liabilities
Long-term debt
$
26,393
$
50,718
$378,869
$150,500
$252,694
Owners'equity
Total liabilities and
Total assets
$139{92
owners'equity
$429,587
GRAFFITI ADVERTISING, INC.
Bal€nce Sheet as of December 31, 2014
$ 15,737
Cash
Accounts receivable
lnventory
Current assets
Net fixed assets
23,209
25,029
$
63,975
$446,942
Accounts payable
Notes payable
$
11,563
18,1 1 3
Current liabilities
Long-term debt
$
29,676
$167,200
$314,041
Owners'equity
Total liabilities and
Total assets
@
Challenge
(Questions 24-25)
$51q91_z
owners'equity
24, Net Fixed Assets and Depreciation. on the balance
$510,917
sheet, the net fixed assets
(NFA) account is equal to the gross fixed assets (FA) account (which records the
acquisition cost of fixed assets) minus the accumulated depreciation (AD) account
(which records the total depreciation taken by the firm against its'fixed assets). Using
the fact that NFA : FA - AD, show that the expression given in the chapter for net
capital spending, NFA -, - NFA-_ * D (where D is rhe depreciation expense during
the year), is
equiruenfit rn""u
j'Fq*.
25. Thx Rates. Refer to the corporate marginal tax rate information in Table 2.3.
b.
Why do you think the marginal tax rate jumps up from 34 percent to 39 percent
at a taxable income of $100,001, and then falls back to a 34 percent marginal
rate al a taxable income of $335,001?
Compute the average tax rate for a corporation with exactly $335,001 in taxable
income. Does this confum your explanation in part (a)? What is the average tax
rate for a corporation with exactly $18,333,334? Is the same thing happening
here?
c.
ffi
ffi
Both the 39 percent and 38 percent tax rates represent what is called a tax
"bubble." Suppose the government wanted to lower the upper threshold of the
39 percent marginal tax bracket from $335,000 to $200,000. What would the
new 39 percent bubble rate have to be?
2.1 Change in ilet Working Gapita!. Visit Alcoa
ITUHAT'$ OT{
TIIE I'UEB?
at www;alcoa.com. Find the most
recent annual report and locate the balance sheets for the past two years. Use these balance
sheets to calculate the change in net working capital. Hcm do you interpret this number?
2.2 Book Yalues vorsus Market Values. The home page for Coca-Cola Company
be fbund at www.coca-cola.com. Locate the most recent armual repofi, which contains
a balance sheet for the company. What is the book value of equity for Coca-Cola? The
T
can
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2
Financial Statements, Thxes, and Cash Flow
market value of a company is the number of shares of stock outstanding times the price
per share. This information can be found at finance.yahoo.com using the ticker symbol for
Coca-Cola (KO). What is the market value of equity? Which number is more relevanr for
shareholders?
2.3 Net Working Capital. Duke Energy is one of the world's largest energy companies.
Go to the company's home page at www.dukeenergy.com, follow ttre link to the investor's
page, and locate the annual reports. What was Duke Energy's net working capital for the
most recent year? Does this number seem low to you given Duke's curent liabilities? Does
this indicate that Duke Energy may be experiencing financial problems? Why or why not?
2.4 Cash FIows to Stockholdens and Greditors. Cooper Tire and Rubber Company
provides financial information for investors on its website at www.coopertires.com. Follow
the "lnvestors" link and find the most recent annual report. Using the consolidated statement
ofcash flows, calculate fhe cash flow to stockholders and the cash flow to creditors.
EXCEL MASTEfr
'I'
PROBLEM
Using Excel to find the marginal tax rate can be accomplished using the VLOOKUP function. However, calculating the total tax bill is a little more difficult. Below we have shown
a copy of the IRS tax table for an individual from a recent year. Often, tax tables are presented in this format.
lf taxable income
Is over.
But not
.,
over.,.
$0
7,825
$7,825
31,850
,850
77,100
77,100
160,850
160,850
349,700
31
Thetaxls:
'10% of the amount over $0
$782.50 plus 15% of the amount over $7,825
$4,386.25 plus 25% of the amount over $31 ,850
$'15,698.75 plus 28% of the amount over $77,100
$39,148.75 ptus 33% of the amount over $1 60,850
$101 ,469.25 plus 35% of the amount over $349,700
349,700
ln reading this table, the marginal tax rate for taxable income less than $7,825 is 107o. If
the taxable income is between $7,825 and $31 ,850, the tax bill is $782.50 plus the marginal
taxes. The marginal taxes are calculated as the taxable income minus $7,825 times the
marginal tax rate of l5Vo.
Below, we have the corporate tax table as shown in the textbook, as well as a taxable
income.
faxable income
is grcater than
or equal to . . .
$0
But less
fhx
than
rate
..
.
50,001
$50,000
75,000
75,001
100,001
33s,000
34
39
335,001
10,000,000
34
10,000,001
15,000,001
15,000,000
35
18,333,333
38
I
8,333,334
100,000
l5Vo
25
35
49
50
pAR
r 2
Understanding Financial Statements and Cash Flow
a.
Create a tax table in Excel lor corporate taxes similar to the individual tax table
shown above. Your spreadsheet should then calculate the marginal tax rate, the
average tax rate, and the tax bill for any level of taxable income inprut by a user.
b.
c.
d.
For a taxable income of
$
1
,3-50.000. what is the marginal tax rate?
For a taxable income of $ 1.350,000, whal is the total tax bi]l?
For a taxable income of $1,350,000, what is the average tax rate'l
c HA
uu
2
Financial Statements, Thxes, andCashFlow
ffi cormect' 8:ff:it"8i:ffi ffiJlilffi #ffi1;Y;xJ,
QUE$TIONS AND PROBLEMS
lFlNAilcE section of tho preface for more lnformaflon,
l. Building a Balance Sheet. Kroeger, Inc., has culrent assets of $1,970, net fixed Basic
assets of $9,650, current liabilities of $ 1,520, and long-term debt of $4,370. What is
(Questions 1-1 3)
the value of the shareholders' equity account for this firm? How much is net working
capital?
m
2. Building an lncome $tatement. Draiman, Inc., has
sales of $795,000, costs of
$345,000, depreciation expense of $76,000, interest expense of $41,000, and a tax
rate of 35 percent. What is the net income for this firm?
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3. Dividends and Retained Earnings.
Suppose the firm in Problem 2 paid out
$56,000 in cash dividends. What is the addirion to retained earnings?
4. Penshare Earnings and Dividends, suppose the firm in Problem 3 had 60,000
shares of common stock outstanding. What is the earnings per share, or EPS, figure?
What is the dividends per share figure?
TM
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5. Market Values and Book Values. Klingon Widgets, Inc., purchased new
cloaking machinery three years ago for $B million. The machinery can be sold to the
Romulans today for $6.7 million. Klingon's cuffent balance sheet shows net fixed
assets of $3.1 million, current liabilities of $790,000, and net working capital of
$145,000. If all the curent assets were liquidated today, the company would receive
$865,000 cash. What is the book value of Klingon's total assets today? What is the
market value?
6. Galculating Taxes. The SGS Co. had $215,000 in taxable income. Using the
rates from Trible 2.3 in the chapter, calculate the company's income taxes.
7. Tax
Rates' In Problem 6, what is the average
tax rate? What is the marginal tax
rate?
8. Calculating OCF, Hammett, Inc., has sales of $34,630, costs of $10,340,
depreciation expense of $2,520, and interest expense of $1,750. If the tax rate is
35 percent, what is the operating cash flow, or OCF?
9. Calculating Net Gapital Spending. Rotweiler Obedience School's December 31,
2013, balance sheet showed net fixed assets of $ 1,635,000, and the December 3 1 ,
2Ul4,balance sheet showed nel fixed assets of 91,976,000. The company'sZ0l4
income statement showed a depreciation expense of $305,000. What was Rotweiler's
net capital spending for 2014?
I O. Calculating Additions to NWC. The Decemb er 31, 2013, balance sheet of
Maria's Tennis Shop, Inc., showed current assets of $1,045 and current liabilities of
$960. The December 3t,2014, balance sheet showed current assets of $1,310 and
cuffent liabilities of $ 1 ,090. what was the company's 2014 change in net working
capital, or NWC?
I
'1. Gash Flow to credltors. The December 31,2013, balance sheet of Schism, Inc.,
showed long-term debt of $1,280,000, and the December 3I,Z}L4,balance sheet
showed long-term debt of $1,410,000. The 2014 income statement showed an interest
expense of $93,400. What was the frm's cash flow to creditors d:unng2}l4?
12. Cash Flow to $tockholders. The December 31, 2013, balance sheet of Schism,
Inc., showed $120,000 in the common stock account and $2,120,000 in the additional
paid-in surplus account. The December 31,20t4, balance sheet showed $135,000
and $2,380,000 in the same two accounts, respectively. If the company paid out
$135,000 in cash dividends during 2}l4,whatwas the cash flow to stockholders for
the year?
45
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r 2
Understanding Financial Statements and Cash Flow
13" Calculating Gash
Flows.
Given the information for Schism, Inc., in Problems
11 and 12, suppose you also know that the firm's net capital spending for 2014 was
$640,000, and that the firm reduced its net working capital investment by $105,000.
What was the firm's 2014 operating cash flow, or OCF?
lntermediate
(Questions 14*23)
14, Calculating Cash Flows. Weiland Co. shows the following information on
its 2014 income statement: sales = $167,000; costs : $88,600; otler expenses :
$4,900; depreciation expense = $11,600; interestexpense : $8,7ff)i t&xes = $18,620;
dividends : $9,700.In addition, you're told that the firm issued $2,900 in new equity
during 20!4, andredeemed $4,000 in outstanding long-term debt.
a. What is the2014 operating cash flow?
b. What is the2014 cash flow to creditors?
c. What is uhe 2Al4 cash flow to stockholders?
d. If net fixed assets increased by $23,140 during the year, what was the addition to
NWC?
15. Using tncome Statements. Given the following intbrmation for Sookie's
Cookies Co., calculate the depreciation expense: sales
addition l.o retained earnings
$2,600: dividends paid
rate
percent.
tax
$1,670;
40
:
:
: $55.0001 costs : $43,200;
: $1.150; interest expense =
16, Preparing a Balance Sheet. Prepare a balance sheel for Alaskiur Orange Corp.
as of December 31,2014, based on the following information: cash = $197,000;
:
:
patents and copyrights
$863,000; accounts payable
$288,000; accounrs
receivable $265,000: tangible net fixed assets $5,300.000; invenrory
$563,000; notes payable
$194,000; accumulaled retained eamings
$4.586,000;
:
long-term debt
:
=
:
:
:
$1,450,000.
17. Residual Claims. Chevelle, Inc., is obligated to pay irs creditors $7,800 during
the year.
a.
b.
What is the value of the shareholders' equity
What if assets equal $6,900?
if
assets equal $9,300?
18, Marginal versus Average Tax Rates. (Refer to Table 2.3.) Corporation Growth
has $83,000 in taxable income, and Corporation Income has $8,300,000 in taxable
income.
a.
b.
fr,
What is the tax bill for each firm?
Suppose both firms have identified a new project that will increase taxable
income by $10,000. How much in additional taxes will each flrm pay? Why is
this amount the same?
19, Net lncome and OGF. During the year, Belyk Paving Co. had sales of
$2,600,000. Cost of goods sold, administrative and selling expense.q, and depreciation
expense were $1,,535,000, $465,000, and $520,000, respectively. In addition, the
company had an interest expense of $245,000 and a tax rate of 35 percent. (Ignore
any tax loss carryback or carryforward provisions.)
a.
b.
c.
What is Belyk's net income?
What is its operating cash flow?
Explain your results in (a) and (b).
2O. Accounting Valucs versus Cash Flows. In Problem 19, suppose Belyk Paving
Co. paid out $420,000 in cash dividends. Is this possible? If net capital spending was
zero, no new investments were made in net working capital, and no new stock was
issued during the year, what do you know about the firm's long-tenn debt account?
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Financial Statements, Taxes, and Cash trlow
47
21. Galculating Cash Flows. Titan Foorball Manufacturing had the following
:
:
operating results for 2014: sales
$23,730; cost of goods sold
$16,780;
depreciation expense = $2,840; interest expense
$414; dividends paid
$616. At
the beginning of the year, net fixed assets were $16,560, current assets were fi2,940,
and cunent liabilities were $2,592. At the end of the year, net fixed assets were
$18,840, current assets were $3,528, and current liabilities were $2,484. The tax rate
for 2014 was 35 percent.
a.
b.
c.
d.
:
:
What is net income for 2014?
What is the operating cash flow for 2014'l
What is the cash flow from assets for 2014? Is this possible? Explain.
If no new debt was issued during the year, what is the cash flow to creditors?
What is the cash flow to stockholders? Explain and interpret the positive and
negative signs of your answers in (a) through (d).
22. Calculating Cash Florars, Consider the following abbreviated financial
statements for Cabo Wabo, Inc.:
oABO WABO, !NC.
Partial Balance Sheets as of December 3'1, 2013 and 2014
2013
2013
2014
CABO WABO, INC.
2014lncome Statement
2014
Liabilities and
Assets
Owners'Equity
Current assets $ 3,198 $ 3,389
Net fixed assets 14,826 15,500
a.
b.
c.
Current liabilities
Long-term debt
$1
,381
$2,030
8,086
Sales
Costs
Depreciation
lnterest paid
9,434
What is owners' equity for 2013 arrd2014?
What is the change in net working capital for 20L4?
ln20L4, Cabo Wabo purchased $8,424 in new fixed assets. How much in fixed
assets did Cabo Wabo sell? What is the cash flow from assets for the year? (The
tax rate is 40 percent.)
d.
During 2014, Cabo Wabo raised $2,535 in new long-term debt. How much longterm debt must Cabo Wbbo have paid off during the year? What is the cash flow
to crcditors?
23, Gash Flow ldentity. GraffitiAdvertising,Inc., reported the fbllowing financial
statements for the last two years. Construct the cash flow identity for the company.
Explain what each number means.
2014lncome Statement
Sales
Cost of goods sold
Selling & administrative
Depreciation
EBIT
$621,720
334,427
137,206
60,033
$
lnterest
EBT
Taxes
90,054
21,226
$
68,828
27,531
Net income
Dividends
Addition to retained earnings
$ 15,600
$ 25,697
$47,842
23,992
4,040
750
48
paH
r 2
Understanding Financial Statements and Cash Flow
GRAFFITI AD]/ERTISING, INC.
Balance Sheet as of December 31, 20'13
$
Cash
Accounts receivable
lnventory
Current assets
Net fixed assets
14,652
20,893
Accounts payable
Notes payable
$
10,535
15,858
15,173
Current liabilities
Long-term debt
$
26,393
$
50,718
$378,869
$150,500
$252,694
Owners'equity
Total liabilities and
Total assets
$139{92
owners'equity
$429,587
GRAFFITI ADVERTISING, INC.
Bal€nce Sheet as of December 31, 2014
$ 15,737
Cash
Accounts receivable
lnventory
Current assets
Net fixed assets
23,209
25,029
$
63,975
$446,942
Accounts payable
Notes payable
$
11,563
18,1 1 3
Current liabilities
Long-term debt
$
29,676
$167,200
$314,041
Owners'equity
Total liabilities and
Total assets
@
Challenge
(Questions 24-25)
$51q91_z
owners'equity
24, Net Fixed Assets and Depreciation. on the balance
$510,917
sheet, the net fixed assets
(NFA) account is equal to the gross fixed assets (FA) account (which records the
acquisition cost of fixed assets) minus the accumulated depreciation (AD) account
(which records the total depreciation taken by the firm against its'fixed assets). Using
the fact that NFA : FA - AD, show that the expression given in the chapter for net
capital spending, NFA -, - NFA-_ * D (where D is rhe depreciation expense during
the year), is
equiruenfit rn""u
j'Fq*.
25. Thx Rates. Refer to the corporate marginal tax rate information in Table 2.3.
b.
Why do you think the marginal tax rate jumps up from 34 percent to 39 percent
at a taxable income of $100,001, and then falls back to a 34 percent marginal
rate al a taxable income of $335,001?
Compute the average tax rate for a corporation with exactly $335,001 in taxable
income. Does this confum your explanation in part (a)? What is the average tax
rate for a corporation with exactly $18,333,334? Is the same thing happening
here?
c.
ffi
ffi
Both the 39 percent and 38 percent tax rates represent what is called a tax
"bubble." Suppose the government wanted to lower the upper threshold of the
39 percent marginal tax bracket from $335,000 to $200,000. What would the
new 39 percent bubble rate have to be?
2.1 Change in ilet Working Gapita!. Visit Alcoa
ITUHAT'$ OT{
TIIE I'UEB?
at www;alcoa.com. Find the most
recent annual report and locate the balance sheets for the past two years. Use these balance
sheets to calculate the change in net working capital. Hcm do you interpret this number?
2.2 Book Yalues vorsus Market Values. The home page for Coca-Cola Company
be fbund at www.coca-cola.com. Locate the most recent armual repofi, which contains
a balance sheet for the company. What is the book value of equity for Coca-Cola? The
T
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2
Financial Statements, Thxes, and Cash Flow
market value of a company is the number of shares of stock outstanding times the price
per share. This information can be found at finance.yahoo.com using the ticker symbol for
Coca-Cola (KO). What is the market value of equity? Which number is more relevanr for
shareholders?
2.3 Net Working Capital. Duke Energy is one of the world's largest energy companies.
Go to the company's home page at www.dukeenergy.com, follow ttre link to the investor's
page, and locate the annual reports. What was Duke Energy's net working capital for the
most recent year? Does this number seem low to you given Duke's curent liabilities? Does
this indicate that Duke Energy may be experiencing financial problems? Why or why not?
2.4 Cash FIows to Stockholdens and Greditors. Cooper Tire and Rubber Company
provides financial information for investors on its website at www.coopertires.com. Follow
the "lnvestors" link and find the most recent annual report. Using the consolidated statement
ofcash flows, calculate fhe cash flow to stockholders and the cash flow to creditors.
EXCEL MASTEfr
'I'
PROBLEM
Using Excel to find the marginal tax rate can be accomplished using the VLOOKUP function. However, calculating the total tax bill is a little more difficult. Below we have shown
a copy of the IRS tax table for an individual from a recent year. Often, tax tables are presented in this format.
lf taxable income
Is over.
But not
.,
over.,.
$0
7,825
$7,825
31,850
,850
77,100
77,100
160,850
160,850
349,700
31
Thetaxls:
'10% of the amount over $0
$782.50 plus 15% of the amount over $7,825
$4,386.25 plus 25% of the amount over $31 ,850
$'15,698.75 plus 28% of the amount over $77,100
$39,148.75 ptus 33% of the amount over $1 60,850
$101 ,469.25 plus 35% of the amount over $349,700
349,700
ln reading this table, the marginal tax rate for taxable income less than $7,825 is 107o. If
the taxable income is between $7,825 and $31 ,850, the tax bill is $782.50 plus the marginal
taxes. The marginal taxes are calculated as the taxable income minus $7,825 times the
marginal tax rate of l5Vo.
Below, we have the corporate tax table as shown in the textbook, as well as a taxable
income.
faxable income
is grcater than
or equal to . . .
$0
But less
fhx
than
rate
..
.
50,001
$50,000
75,000
75,001
100,001
33s,000
34
39
335,001
10,000,000
34
10,000,001
15,000,001
15,000,000
35
18,333,333
38
I
8,333,334
100,000
l5Vo
25
35
49
50
pAR
r 2
Understanding Financial Statements and Cash Flow
a.
Create a tax table in Excel lor corporate taxes similar to the individual tax table
shown above. Your spreadsheet should then calculate the marginal tax rate, the
average tax rate, and the tax bill for any level of taxable income inprut by a user.
b.
c.
d.
For a taxable income of
$
1
,3-50.000. what is the marginal tax rate?
For a taxable income of $ 1.350,000, whal is the total tax bi]l?
For a taxable income of $1,350,000, what is the average tax rate'l
Purchase answer to see full
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