Consider the following 2017 information for your company, which began operations on January 1, 2017. (So it
Question:
Consider the following 2017 information for your company, which began operations on January 1, 2017. (So it did not exist in 2016, and therefore had no balance sheet.)
- Number of units sold in 2017: 1,000
- Price per unit: $1,000
- Cost of goods sold for each unit: 65% of the price
- Other expenses (except depreciation): $50,000
- On January 1, the company bought $500,000 of fixed assets. You assume these assets will last 5 years
and have no salvage value (i.e., after 5 years you will need to scrap them and will not be able to sell
them for any money). You will depreciate these assets linearly over the five years.
- On January 1, the company received $200,000 as investment from its shareholders.
- On January 1, the company borrowed $400,000 from the bank at a rate of 5.0%. At the end of the
year, the company will pay the interest due on that amount only. (In other words, it will not pay
down the loan, since this is not an amortizing loan.)
- The tax rate is 20% and the company will pay its taxes at the end of the year.
- The company paid the owners $25,000 in dividends at the end of the year.
Using the above information, answer the questions below.
a. Create an income statement for the company. Remember to consider interest expense and depreciation. (5 points)
b. Calculate the operating cash flow (EBIT – Tax + Depreciation). (2 points)
c. Calculate the cash flow to creditors/debt. (2 points)
d. Calculate the cash flow to stockholders/equity. (2 points)
e. Calculate the cash flow from assets (CFFA). (2 points)
f. Can you calculate the changes in net working capital? If so, how much was it? (1 point)
g. How would the income statement change if the fixed assets were depreciated over 10 years instead of 5 years? Explain/calculate. (3 points)
h. If the fixed assets were depreciated over 10 years instead of 5 years as discussed in question 7 above, how would it affect the operating cash flow of the company? Explain/calculate. (3 points)
Intermediate Accounting Reporting and Analysis
ISBN: 978-1285453828
2nd edition
Authors: James M. Wahlen, Jefferson P. Jones, Donald Pagach