FIN 300 Study Guide - Operating Cash Flow, Cash Flow, Income Statement
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ABC CORP BALANCE SHEET
December 31, 2010
Cash $ 50
Marketable Securities 0
Accounts Receivables 2,000
Inventory 70
Fixed Assets ( net ) 2,000
Total Assets =====
Accounts Payable $ 2,340
Notes Payable 0
Retained earnings ?
Common Stock 1,400
Total of Both Liabilities & Equity =====
For the year ended 12/31/10 ABC CORP generated Sales of $12,000 and Net Income of $120. The net profit margin this year is considered normal by ABC CORP. Cost of Goods Sold was $8,400 in 2010. Cost of Goods Sold consistently averages seventy per cent of Sales, and will continue to do so in the future. Depreciation Expense was $500 in 2010. No Depreciation Expense was, or ever will, be included in Cost of Goods Sold.
Fixed Operating Costs, excluding Depreciation Expense, were equal to $1,200 for 2010. These Fixed Operating Costs included all utilities, all insurance, all rent, all property taxes, and all labor charges. Fixed Operating Costs (other than depreciation expense) are paid for immediately, as they are incurred. Fixed Operating Costs were spread evenly throughout the year 2010. With regard to the size and timing of these costs, it is anticipated that the experience of 2010 will be repeated in 2011. Therefore, we anticipate cash payments associated with Fixed Operating Costs to equal $100 per month in 2011. Because of losses in recent years at ABC Corp and the loss carry forward provisions of the tax code there were no income taxes paid in 2010, and it is anticipated in 2011 that no income tax payments will be made.
Interest paid in 2010 was $40 and dividends paid in that same year were $60 Interest payments are made monthly and dividends are paid at the end of every quarter. The next dividend payment is scheduled for March 2011. The dividend payout ratio in 2010 is considered normal for ABC CORP. The annual interest rate for bank borrowing is six percent per year (one-half of one per cent per month). Interest paid in the current month is based on the previous monthâs balance in Notes Payable. The target cash balance for the end of any current month is equal to ten percent of next monthâs sales. Target ending inventory at the end of any current month is equal to twenty percent of estimated cost of goods sold for the next month. All purchases of inventory are paid for in the month following purchase. The entire balance of Accounts Payable, at any given point in time, represents the purchase of inventory which has not yet been paid for. One-half of all sales are collected in the month of sale, the remainder in the following Month.
The sales forecast for the first four months of 2011 is
January $1,000
February 800
March 3,200
April 2,000
Sales for October, November and December of the year 2010 were $2,000 $2,000 and $4,000, respectively. It is the policy of the company to repay bank borrowing as soon as possible; If money is not needed for this purpose, then investments of marketable securities are made. Marketable Securities should be liquidated to satisfy any subsequent need for cash flow before any new bank borrowing is done. The annual yield on marketable securities is three per cent (one-quarter of one percent per month). Interest payments to the firm are based on the previous monthâs balance in Marketable Securities. On the next two pages, you will find a partially completed Cash Budget. Some numbers are filled in for your convenience. For only the month of January 2011, you are to fill in missing amounts in this Cash Budget. When you answer to this requirement remember to write zero if you mean zero because a blank will not be interpreted as zero. â
| The Cash Budget | |||
| Nov 10 | Dec 10 | Jan 11 | |
| Sales | 1,000 | 2,000 | 500 |
| Cost of goods sold | 700 | 1400 | 350 |
| Beginning Inventory | 140 | 280 | 70 |
| Ending Inventory | 280 | 70 | 56 |
| Purchases | 840 | 1,190 | 336 |
| Cash Collections: | X | X | X |
| Collected in month of sale | X | X | |
| Collected month after sale | X | X | |
| Other Inflow: | X | X | |
| Interest Income Payments | X | X | 0 |
| TOTAL INFLOWS | X | X | |
| Outflows: | X | X | X |
| Payment for Purchases | X | X | |
| Interest Payments | X | X | 0 |
| Overhead Payments | X | X | 100 |
| Fixed Asset Additions | X | X | 0 |
| Dividend payments | X | X | 0 |
| Income Tax Payments | X | X | 0 |
| TOTAL OUTFLOWS | X | X | |
| Inflow - Outflow | X | X | |
| Beginning Cash | X | X | |
| Desired (Ending) Cash | X | 50 | 80 |
| Cash Produced Over + or Under - Immediate Need | X | X | |
| Loan Required | X | X | |
| Loan Repaid | X | X | |
| Loan balance | X | 0 | |
| Securities Purchased | X | X | |
| Securities Sold | X | X | |
| Securities Balance | X | 0 | |
I need help with this assignment and with filling in the blanks
ABC CORP
BALANCE SHEET
December 31, 2010
Cash $ 50
Marketable Securities 0
Accounts Receivables 1,000
Inventory 70
Fixed Assets ( net ) 2,000
Total Assets = 3,120
=====
Accounts Payable $ 1,170
Notes Payable 0
Retained earnings ?
Common Stock 1,400
Total of Both Liabilities & Equity =====
For the year ended 12/31/10 ABC CORP generated Sales of $6,000 and Net Income of $60. The net profit margin this year is considered normal by ABC CORP. Cost of Goods Sold was $4,200 in 2010. Cost of Goods Sold consistently averages seventy per cent of Sales, and will continue to do so in the future. Depreciation Expense was $500 in 2010. No Depreciation Expense was, or ever will, be included in Cost of Goods Sold. Fixed Operating Costs, excluding Depreciation Expense, were equal to $1,200 for 2010. These Fixed Operating Costs included all utilities, all insurance, all rent, all property taxes, and all labor charges. Fixed Operating Costs (other than depreciation expense) are paid for immediately, as they are incurred. Fixed Operating Costs were spread evenly throughout the year 2010. With regard to the size and timing of these costs, it is anticipated that the experience of 2010 will be repeated in 2011. Therefore, we anticipate cash payments associated with Fixed Operating Costs to equal $100 per month in 2011. Because of losses in recent years at ABC Corp and the loss carry forward provisions of the tax code there were no income taxes paid in 2010, and it is anticipated in 2011 that no income tax payments will be made.
Interest paid in 2010 was $40 and dividends paid in that same year were $60 Interest payments are made monthly and dividends are paid at the end of every quarter. The next dividend payment is scheduled for March 2011. The dividend payout ratio in 2010 is considered normal for ABC CORP. The annual interest rate for bank borrowing is six percent per year (one-half of one per cent per month). Interest paid in the current month is based on the previous monthâs balance in Notes Payable.
The target cash balance for the end of any current month is equal to ten percent of next monthâs sales.
Target ending inventory at the end of any current month is equal to twenty percent of estimated cost of goods sold for the next month. All purchases of inventory are paid for in the month following purchase. The entire balance of Accounts Payable, at any given point in time, represents the purchase of inventory which has not yet been paid for. One-half of all sales are collected in the month of sale, the remainder in the following Month. The sales forecast for the first four months of 2011 is
January $ 500
February 400
March 1,600
April 1,000
Sales for October, November and December of the year 2010 were $1,000 $1,000 and $2,000, respectively.
It is the policy of the company to repay bank borrowing as soon as possible; If money is not needed for this purpose, then investments of marketable securities are made. Marketable Securities should be liquidated to satisfy any subsequent need for cash flow before any new bank borrowing is done. The annual yield on marketable securities is three per cent (one-quarter of one percent per month). Interest payments to the firm are based on the previous monthâs balance in Marketable Securities.
On the next two pages, you will find a partially completed Cash Budget. Some numbers are filled in for your convenience. For only the month of January 2011, you are to fill in missing amounts in this Cash Budget. When you answer to this requirement remember to write zero if you mean zero because a blank will not be interpreted as zero.
| The Cash Budget | |||
| Nov 10 | Dec 10 | Jan 11 | |
| Sales | 1,000 | 2,000 | 500 |
| Cost of goods sold | 700 | 1400 | 350 |
| Beginning Inventory | 140 | 280 | 70 |
| Ending Inventory | 280 | 70 | 56 |
| Purchases | 840 | 1,190 | 336 |
| Cash Collections: | X | X | |
| Collected in month of sale | X | X | |
| Collected month after sale | X | X | |
| Other Inflow: | X | X | |
| Interest Income Payments | X | X | 0 |
| TOTAL INFLOWS | X | X | |
| Nov 10 | Dec 10 | Jan 11 | |
| Outflows: | |||
| Payment for Purchases | X | X | |
| Interest Payments | X | X | 0 |
| Overhead Payments | X | X | 100 |
| Fixed Asset Additions | X | X | 0 |
| Dividend payments | X | X | 0 |
| Income Tax Payments | X | X | 0 |
| TOTAL OUTFLOWS | X | X | |
| Inflow - Outflow | X | X | |
| Beginning Cash | X | X | |
| Desired Cash | X | 50 | 40 |
| Cash Produced Over + or Under - Immediate Need | X | X | |
| Loan Required | X | X | |
| Loan Repaid | X | X | |
| Loan balance | X | 0 | |
| Securities Purchased | X | X | |
| Securities Sold | X | X | |
| Securities Balance | X | 0 | |
Question
Analysis of Financial Statements
Balance Sheets
EXHIBITS: INPUT DATA (XYZ)
Table 1 Balance Sheets
| Assets | 2013E | 2012 | 2011 |
| cash | $ 85,632 | $7,282 | $57,600 |
| Acount Receivable | 878,000 | 632,160 | 351,200 |
| Inventories | 1,716,480 | 1,287,360 | 715,200 |
| Total current assets | $2,680,112 | $1,926,802 | $ 1,124,000 |
| Gross fixed assets | 1,197,160 | 1,202,950 | 491,000 |
| Less: accumulated depreciation | 380,120 | 263,160 | 146,200 |
| Net fixed assets | $ 817,040 | $ 939,790 | $ 344,800 |
| Total assets | $3,497,152 | $2,866,592 | $ 1,468,800 |
| Liabilities and equity | |||
| Accounts payable | $ 436,800 | $ 524,160 | $ 145,600 |
| Notes payable | 300,000 | 636,808 | 200,000 |
| Accruals | 408,000 | 489,600 | 136,000 |
| Total current liabilities | $1,144,800 | $1,650,568 | $ 481,600 |
| Long term bonds | 400,000 | 723,432 | 323,432 |
| Total debt | $1,544,800 | $2,374,000 | $ 805,032 |
| Common stock (100,000 shares) | 1,721,176 | 460,000 | 460,000 |
| Retained earnings | 231,176 | 32,592 | 203,768 |
| Total common equity | $1,952,352 | $ 492,592 | $ 663,768 |
| Total liabilities and equity | $3,497,152 | $2,866,592 | $ 1,468,800 |
Analysis of Financial Statements
Income Statements
Table 2
Income Statements
| 2013E | 2012 | 2011 | |
| Sales | $7,035,600 | $6,034,000 | $ 3,432,000 |
| Cost of goods sold | 5,875,992 | 5,528,000 | 2,864,000 |
| Other expenses | 550,000 | 519,988 | 358,672 |
| Total operating exp. excl. depreciation and amortization | $6,425,992 | $6,047,988 | $ 3,222,672 |
| EBITDA | $ 609,608 | $(13,988) | $ 209,328 |
| Depreciation and amortization | 116,960 | 116,960 | 18,900 |
| Earnings before interest and taxes (EBIT) | $492,648 | $(130,948) | $190,428 |
| Interest expense | 70,008 | 136,012 | 43,828 |
| Earnings before taxes (EBT) | $ 422,640 | $ (266,960) | $ 146,600 |
| Taxes (40%) | 169,056 | (106,784) | 58,640 |
| Net Income | $ 253,584 | $ (160,176) | $ 87,960 |
| Earnings per share (EPS) | $ 1.014 | $ (1.602) | $ 0.880 |
| Dividends per share (DPS) | $ 0.220 | $ 0.110 | $ 0.220 |
| Book value per share (BVPS) | $ 7.809 | $ 4.926 | $ 6.638 |
| Stock price | $ 12.17 | $ 2.25 | $ 8.50 |
| Shares outstanding | 250,000 | 100,000 | 100,000 |
| Tax rate | 40.00% | 40.00% | 40.00% |
| Lease payments | $ 40,000 | $ 40,000 | $ 40,000 |
| Sinking fund payments | 0 | 0 | 0 |
Analysis of Financial Statements
Ratio Analysis
| 2013E | 2012 | 2011 | Industry Average | |
| Current ratio | * | 1.2 | 2.3 | 2.7 |
| Quick ratio | * | 0.4 | 0.8 | 1.0 |
| Inventory turnover | * | 4.7 | 4.8 | 6.1 |
| Days sales outstanding (DSO) | * | 38.2 | 37.4 | 32.0 |
| Fixed assets turnover | * | 6.4 | 10.0 | 7.0 |
| Total assets turnover | * | 2.1 | 2.3 | 2.6 |
| Debt-to- assets ratio | * | 82.8% | 54.8% | 50.0% |
| Times interest earned (TIE) | * | -1.0 | 4.3 | 6.2 |
| Operating margin | * | -2.2% | 5.6% | 7.3% |
| Profit margin | * | -2.7% | 2.6% | 3.5% |
| Basic earning power (BEP) | * | -4.6% | 13.0% | 19.1% |
| Return on assets(ROA) | * | -5.6% | 6.0% | 9.1% |
| Return on equity (ROE) | * | -32.5% | 13.3% | 18.2% |
| Price/earnings (P/E) | * | -1.4 | 9.7 | 14.2 |
| Market/book (M/B) | * | 0.5 | 1.3 | 2.4 |
| Book value per share (BVPS) | * | $4.93 | $6.64 | n.a. |
Requiremnts:
Note: Question 1 through 5 has been answered completley, thank you very much. Please I am waiting for the question 6 and 7.
6. Use the extended DuPont equation to provide a summary and overview of XYZâs financial condition as projected for 2013.
7. Use the following simplified 2013 balance sheet to show, in general terms, how an improvement in the DSO would tend to affect the stock price. For example, if the company could improve its collection procedures and thereby lower its DSO from 45.6 days to the 32-day industry average without affecting sales, how would that change âripple throughâ the financial statements (shown in thousands below) and influence the stock price?
Accounts receivable $878 Debt $1,545
Other current assets 1,802
Net fixed assets 817 Equity 1,952
Total assets $3,497 Liabilities plus equity $3,497
First, we need to calculate XYZâs daily sales.
Daily sales = Sales / 365
Daily sales = $7,035,600 / 365
Daily sales = $19,275.62
Target A/R = Daily sales à Target DSO
Target A/R = $19,276 Ã 32
Target A/R = $616,820
Freed-up cash = old A/R â new A/R
Freed-up cash = $878,000 â $616,820
Freed-up cash = $261,180