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ADM 3350 Study Guide - Midterm Guide: Capital Structure, Risk Premium, Capital Asset Pricing Model

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whitemammoth362
6 Feb 2015
School
University of Ottawa
Department
Administration
Course
ADM 3350
Professor
Kaouthar Lajili

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Document Summary

Understand the components of operating and cash cycles and why they are important. Be able to prepare a cash budget. Current assets are cash and other assets expected to be converted into cash within the. 27. 1 tracing cash and net working capital year (ex: cash, marketable securities, accounts receivables, inventories: presented on the balance sheet in order of liquidity. Current liabilities are obligations that are expected to require cash payment within one year or within the operating cycle (ex: accounts payable, accrued wages, taxes, notes payable) N et working capital+ assets=long term debt + equit y. 27. 2 defining cash in terms of other elements (cash+othercurrent assets liabilities)+ assets=long term debt +equit y. C ash=long term debt +equit y assets net workingcapital less cash. Interpretation: increasing long-term debt and equity and decreasing net working capital and fixed assets will increase cash. The short-term finance policy that a firm adopts will be composed of two elements: the firm"s investment in current assets.

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Related Questions

[The following information applies to the questions displayedbelow.]

Forten Company, a merchandiser, recently completed itscalendar-year 2017 operations. For the year, (1) all sales arecredit sales, (2) all credits to Accounts Receivable reflect cashreceipts from customers, (3) all purchases of inventory are oncredit, (4) all debits to Accounts Payable reflect cash paymentsfor inventory, and (5) Other Expenses are paid in advance and areinitially debited to Prepaid Expenses. The company’s incomestatement and balance sheets follow.

FORTEN COMPANY
Comparative Balance Sheets
December 31, 2017 and 2016
2017 2016
Assets
Cash $ 75,400 $ 90,500
Accounts receivable 91,440 67,625
Inventory 301,156 268,800
Prepaid expenses 1,380 2,235
Total current assets 469,376 429,160
Equipment 140,500 125,000
Accum.depreciation—Equipment (45,125 ) (54,500 )
Total assets $ 564,751 $ 499,660
Liabilities andEquity
Accounts payable $ 70,141 $ 140,175
Short-term notes payable 15,100 9,400
Total current liabilities 85,241 149,575
Long-term notes payable 56,500 65,750
Total liabilities 141,741 215,325
Equity
Common stock, $5 par value 196,750 167,250
Paid-in capital in excess ofpar, common stock 54,500 0
Retained earnings 171,760 117,085
Total liabilities andequity $ 564,751 $ 499,660

FORTEN COMPANY
Income Statement
For Year Ended December 31, 2017
Sales $ 667,500
Cost of goods sold 302,000
Gross profit 365,500
Operating expenses
Depreciation expense $ 37,750
Other expenses 149,400 187,150
Other gains (losses)
Loss on sale of equipment (22,125 )
Income before taxes 156,225
Income taxes expense 48,050
Net income $ 108,175

Additional Information on Year 2017Transactions

The loss on the cash sale of equipment was $22,125 (details inb).

Sold equipment costing $97,875, with accumulated depreciation of$47,125, for $28,625 cash.

Purchased equipment costing $113,375 by paying $64,000 cash andsigning a long-term note payable for the balance.

Borrowed $5,700 cash by signing a short-term note payable.

Paid $58,625 cash to reduce the long-term notes payable.

Issued 4,200 shares of common stock for $20 cash per share.

Declared and paid cash dividends of $53,500.

REQUIRED:

1. Prepare a complete statement of cash flows;report its operating activities using the indirect method.(Amounts to be deducted should be indicated with a minussign.)

Forten Company, a merchandiser, recently completed itscalendar-year 2015 operations. For the year, (1) all sales arecredit sales, (2) all credits to Accounts Receivable reflect cashreceipts from customers, (3) all purchases of inventory are oncredit, (4) all debits to Accounts Payable reflect cash paymentsfor inventory, and (5) Other Expenses are paid in advance and areinitially debited to Prepaid Expenses. The company's incomestatement and balance sheets follow.

FORTEN COMPANY
Comparative Balance Sheets
December 31, 2015 and 2014

2015

2014
Assets
Cash $ 49,800 $ 74,000
Accounts receivable 65,900 59,000
Inventory 277,000 252,500
Prepaid expenses 1,500 1,700
Total current assets 394,200 387,200
Equipment 158,500 106,500
Accum. depreciation—Equipment (36,375) (46,000)
Total assets $ 516,325 $ 447,700
Liabilities and Equity
Accounts payable $ 54,325 $ 113,000
Short-term notes payable 9,000 8,000
Total current liabilities 63,325 121,000
Long-term notes payable 65,000 48,000
Total liabilities 128,325 169,000
Equity
Common stock, $5 par value 162,500 150,750
Paid-in capital in excess of par, common stock 35,250 0
Retained earnings 190,250 127,950
Total liabilities and equity $ 516,325 $ 447,700
FORTEN COMPANY
Income Statement
For Year Ended December 31, 2015
Sales $ 582,500
Costof goods sold 287,000
Gross profit 295,500
Operating expenses
Depreciation expense $ 20,000
Other expenses 132,000 152,000
Other gains (losses)
Loss on sale ofequipment (5,250)
Income before taxes 138,250
Income taxes expense 24,250
Netincome $ 114,000
Additional Information on Year 2015Transactions
a. Net income was$114,000.
b. Accountsreceivable increased.
c. Inventoryincreased.
d. Prepaid expensesdecreased.
e. Accounts payabledecreased.
f. Depreciationexpense was $20,000.
g.

Sold equipment costing $46,500, with accumulated depreciation of$29,625, for $11,625 cash. This yielded a loss of $5,250.
h.

Purchased equipment costing $98,500 by paying $25,000 cash and(i.) by signing a long-term note payable for thebalance.
j. Borrowed $1,000cash by signing a short-term note payable.
k. Paid $56,500cash to reduce the long-term notes payable.
l. Issued 2,350shares of common stock for $20 cash per share.
m. Declared andpaid cash dividends of $51,700.
Required:

Prepare a complete statement of cash flows using a spreadsheet;report its operating activities using the indirect method.(Enter all amounts as positive values.)

FORTEN COMPANY
Spreadsheet for Statement ofCash Flows
For Year Ended December 31,2015
Analysis of Changes
December 31, 2014 Debit Credit December 31, 2015
Balance sheet—debit
Cash $74,000 $49,800
Accounts receivable 59,000
Inventory 252,500
Prepaid expenses 1,700
Equipment 106,500
$493,700
Balance sheet—credit
Accumulateddepreciation—Equipment $46,000
Accounts payable 113,000
Short-term notes payable 8,000
Long-term notes payable 48,000
Common stock, $5 parvalue 150,750
Paid-in capital in excess ofpar value, common stock 0
Retained earnings 127,950
$493,700
Statement of cash flows
Operating activities
Investing activities
Financing activities
Non cash investing andfinancing activities
Purchase of equipment financedby long-term note payable

Forten Company, a merchandiser, recently completed its calendar-year 2015 operations. For the year, (1) all sales are credit sales, (2) all credits to Accounts Receivable reflect cash receipts from customers, (3) all purchases of inventory are on credit, (4) all debits to Accounts Payable reflect cash payments for inventory, and (5) Other Expenses are paid in advance and are initially debited to Prepaid Expenses. The company's income statement and balance sheets follow.

FORTEN COMPANY
Comparative Balance Sheets
December 31, 2015 and 2014
2015 2014
Assets
Cash $ 82,580 $ 73,000
Accounts receivable 65,860 56,000
Inventory 276,500 251,500
Prepaid expenses 1,250 1,700
Total current assets 426,190 382,200
Equipment 156,775 106,500
Accum. depreciation—Equipment (42,375) (52,000)
Total assets $ 540,590 $ 436,700
Liabilities and Equity
Accounts payable $ 95,000 $ 111,000
Short-term notes payable 11,000 7,000
Total current liabilities 106,000 118,000
Long-term notes payable 60,165 48,500
Total liabilities 166,165 166,500
Equity
Common stock, $5 par value 162,000 150,250
Paid-in capital in excess of par, common stock 35,250 0
Retained earnings 177,175 119,950
Total liabilities and equity $ 540,590 $ 436,700

FORTEN COMPANY
Income Statement
For Year Ended December 31, 2015
Sales $ 582,000
Cost of goods sold 290,000
Gross profit 292,000
Operating expenses
Depreciation expense $ 20,000
Other expenses 133,600 153,600
Other gains (losses)
Loss on sale of equipment (5,625)
Income before taxes 132,775
Income taxes expense 24,250
Net income $ 108,525

Additional Information on Year 2015 Transactions
a. The loss on the cash sale of equipment was $5,625 (details in b).
b. Sold equipment costing $48,890, with accumulated depreciation of $29,625, for $13,640 cash.
c. Purchased equipment costing $99,165 by paying $35,000 cash and signing a long-term note payable for the balance.
d. Borrowed $4,000 cash by signing a short-term note payable.
e. Paid $52,500 cash to reduce the long-term notes payable.
f. Issued 2,350 shares of common stock for $20 cash per share.
g.

Declared and paid cash dividends of $51,300.
Required:

Prepare a complete statement of cash flows; report its operating activities according to the direct method.(Amounts to be deducted should be indicated with a minus sign.)