$8.$ Analyzing accounting data for managerial decisions

Accounting data is used to generate a firm$$s financial statements, but a firm$$s intrinsic value is based on its free cash flows, which are the cash flows available for distribution to the company$$s investors after the company has made all of the investments necessary to sustain its ongoing operations.

Consider the following case:

J&H Corp. recently hired Jeffery. His immediate mandate was to analyze the company. He has to submit a report on the company$$s operational efficiency and estimate its potential investment in working capital. He has the income statement from last year and the following information from the company$$s financial reports as well as some industry averages.

$$ Last year, J&H Corp. reported a book value of $$400,000$ in current assets, of which $20\%$ is cash, $22\%$ is short$-$term investments, and the rest is accounts receivable and inventory.

$$ The company reported $$340,000$ of current liabilities including accounts payable and accruals. Interestingly, the company had no notes payable outstanding, and there were no changes in the company$$s accounts payable during the year.

$$ The company, however, invested heavily in plant and equipment to support its operations. It reported a book value of $$640,000$ for its operating long$-$term assets last year.

Income Statement For the Year Ended on December $31$

J&H Corp.

Industry Average

Net sales $$41,000,000$ $$51,250,000$

Operating costs, except depreciation and amortization $32,800,00041,000,000$

Depreciation and amortization $1,640,0002,050,000$

Total operating costs $34,440,00043,050,000$

Operating income $($or EBIT$)$ $$6,560,000$ $$8,200,000$

Less: Interest expense $656,0001,230,000$

Earnings before taxes $($EBT$)$ $$5,904,000$ $$6,970,000$

Less: Taxes $(40\%)2,361,6002,788,000$

Net income $$3,542,400$ $$4,182,000$

Based on the information given to him, Jeffery submits a report on January $1$ with some important calculations for management to use, both for analysis and to devise an action plan.

Complete the following statements in his report. If your answer is negative, use the minus sign.

Statement #$1$: J&H Corp.$$s NOPAT is

$$3,936,000$

$,$ which is lower than the industry average of

$$4,920,000$

$.$

Statement #$2$: The company has

$

in operating assets and

$

in operating liabilities.

Statement #$3$: J&H Corp. has

$

in noncash charges, and a net cash flow of

$

$.$

Statement #$4$: J&H Corp.$$s total $,$ which consists of its net operating working capital and its total investment in operating long$-$term assets, is equal to

$

$.$