Module 3 Critical Thinking Assignment Understanding Financial Statements and Cash Flow (100 Points)

Module 3 Critical Thinking Assignment
Understanding Financial Statements and Cash Flow (100 Points)

Complete the following problems. You will likely use a spreadsheet for this assignment but you may choose to type up your answers in a Word document. In either case, be sure to show your work.

Problem 3-1: Working with a Balance Sheet
Prepare a balance sheet from the following information. What is the net working capital and debt ratio?

DATA
Cash 75,000
Account receivables 64,050
Accounts payable 34,500
Short-term notes payable 15,750
Inventories 60,000
Gross fixed assets 1,920,000
Other current assets 7,500
Accumulated depreciation 468,000
Long-term debt 300,000
Common stock 735,000
Other assets 22,500
Retained earnings ?

Solution

Balance Sheet:
Cash
Accounts receivable
Inventories
Other current assets
Total current assets
Gross Buildings and equipment
Accumulated Depreciation
Net fixed assets
Other assets
Total assets

Notes payable
Accounts payable
Total current liabilities
Long-term debt
Total Liabilities
Common Stock
Retained earnings
Total equity
Total liabilities and equity

Net Working Capital =
Debt Ratio =

Problem 3-2: Computing Cash Flows
Given the following information, prepare a statement of cash flows.

DATA
Increase in accounts receivable 75
Increase in inventories 90
Operating Income 225
Interest Expense 75
Increase in accounts payable 75
Dividends 45
Increase in common stock 60
Increase in net fixed assets 69
Depreciation Expense 36
Income taxes 51
Beginning cash 60

Solution

Cash Flows from Operating Activities
*Net Income
Adjustments:
Depreciation
Increase in accounts receivable
Increase in inventories
Increase in account payable

Net Cash provided by operating activities

Cash Flows from Investing Activities
**Increase in gross fixed assets

Cash Flows from Financing Activities
Increase in common stock
Dividends

Net cash provided by financing activities

Decrease in Cash
Beginning Cash
Ending cash

*Net Income = Operating Income – Interest Expense – Income taxes
**The change in gross fixed assets is equal to the change in net fixed assets plus the depreciation expense for the year of, resulting in a change in gross fixed assets.

Problem 3-3: Working with the Statement of Cash Flows
Prepare a statement of cash flows from the following scrambled list of items.

DATA
Increase in inventories 17,500
Operating income 547,500
Dividends 72,500
Increase in accounts payables 107,500
Interest expense 112,500
Increase in common stock 12,500
Depreciation expense 42,500
Increase in accounts receivable 172,500
Increase in long-term debt 132,500
Increase in short-term notes payable 37,500
Increase in gross fixed assets 135,000
Increase in paid in capital 50,000
Income taxes 112,500
Beginning cash 625,000

Solution
Cash Flows from Operating Activities
Net Income
Adjustments:
Depreciation
Increase in accounts receivable
Increase in inventories
Increase in account payable
Net Cash provided by operating activities

Cash Flows from Investing Activities
Increase in plant and equipment

Cash Flows from Financing Activities
Increase in notes payable
Increase in long-term debt
Issued new common stock
Dividends
Net cash provided by financing activities

Net Decrease in cash
Beginning cash
Ending cash

Problem 3-4: Ratio Analysis
The Balance Sheet and Income Statement for Saudi Manufacturing Corporation are as follows:

DATA
Balance Sheet:
Cash 22,500
Acct/Rec 90,000
Inventories 45,000
Current assets 157,500
Net fixed assets 202,500
Total assets 360,000

Accts/Pay 49,500
Accrued expenses 27,000
Short-term N/P 13,500
Current liabilities 90,000
Long-term debt 90,000
Owner’s equity 180,000
Total liabilities and owners’ equity 360,000

Income Statement:
Net sales 360,000
COGS 148,500
Gross profit 211,500
Operating expenses 135,000
Net operating income 76,500
Interest expense 16,515
EBT 59,985
Income taxes 23,985
Net income 36,000

Solution
Calculate the following ratios:
Current ratio =
Debt ratio =
Times interest earned =
Average collection period =
Inventory turnover =
Fixed asset turnover =
Total asset turnover =
Operating profit margin =
Operating return on assets =
Return on equity =

Problem 3-5: Market-Value Ratios
Jeddah Industries has a price earnings ratio of 18.69X.

a. If Jeddah’s earnings per share are SAR 2.65, what is the price per share of Jeddah’s stock?
b. Using the price per share you calculated in part a, determine the price / book ratio if Jeddah’s equity-book value is SAR 12.67.

DATA
Price/earnings ratio 18.69X
Earnings per share (SAR) 2.65
Equity book value (SAR) 12.67

Solution
a. Price per share
b. Price/book ratio

Problem 3-6: Computing Ratios

Use the information from the balance sheet and income statement below to calculate the ratios listed below:

DATA

ASSETS
Cash 250,000
Accounts receivable 75,000
Inventory 125,000
Prepaid expenses 25,000
Total current assets 475,000
Gross plant and equipment 1,002,500
Accumulated depreciation -165,000
Net plant and equipment 837,500
Total assets 1,312,500
DEBT AND EQUITY
Accounts payable 225,000
Accrued liabilities 157,500
Total current debt 382,500
Long-term debt 300,000
Common stock 512,500
Retained earnings 117,500
Total debt and equity 1,312,500

Sales 525,000
Cost of goods sold -225,000
Gross profit 300,000
Selling, general, and administrative expenses -72,500
Depreciation expense -65,000
Operating income 162,500
Interest expense -20,000
Earnings before taxes 142,500
Taxes -40,000
Earnings available to common shareholders 102,500

Solution
RATIOS
Current ratio
Acid-test ratio
Times interest earned
Inventory turnover
Total asset turnover
Operating profit margin
Days in receivables
Operating return on assets
Debt ratio
Fixed asset turnover
Return on equity

Leave a Reply

Your email address will not be published. Required fields are marked *