# Accounting-Complete the table below by calculating the missing performance measures

January 30, 2017

Question
1. Complete the table below by calculating the missing performance measures for the Illini Tap. Calculate liquidity and solvency measures for 2013 and 2014. Note: the profitability, efficiency, and repayments measures can be calculated only for 2014 operations (20 pts.)

Performance Measures for the Illini Tap

Year End

2013

2014

Current Ratio

Working Capital

Working Capital Ratio

Debt-to-Asset Ratio

Debt-to Equity Ratio

Equity-to-Asset Ratio

Return on Assets

n/a

Return on Equity

n/a

Operating Profit Margin

n/a

Asset Turnover Ratio

n/a

Repayment Capacity

n/a

\$116,117

Repayment Margin

n/a

\$56,177

Coverage Ratio

n/a

1.77

2. Is the Illini Tap liquid? Is the bar solvent? Has the liquidity or solvency position of the bar changed dramatically throughout 2014? Do any of the liquidity or solvency measures indicate potential trouble for the bar? Provide a brief discussion for your answers (15 pts.)

3. What does the repayment capacity represent? What does the repayment margin represent? Interpret the term debt and capital lease coverage ratio for the Illini Tap. (10 pts.)

4. Using the table below, briefly perform a DuPont Analysis comparing the ROA and ROE of the Illini Tap to the average for bars in Illinois. Does the Illini Tap use its assets more or less efficiently than the average IL bar? Does the Illini Tap generate more or less profit per dollar of revenue than the average IL bar? How does the Illini Tap’s use of debt financing compare to the average bar in IL? (15 pts.)

Company/Industry

ROE

OPM

ATR

ROA

LM

Unlevered

ROE

Illini Tap

Average for IL Bars

20%

20%

70%

14%

1.67

12%

Extra Credit: What is the Illini Tap’s Interest/Avg. Asset ratio? Is that higher or lower than the average IL bar? (2 pts.)

5. What are the interpretations of the “operational ratios?” What is the sum of the operational ratios and why must this be the case? (5 pts.)

6. Use the information below to calculate the ROE for Vandelay Industries using the following interest rates (cost of debt). SHOW YOUR WORK. (5 pts. each)

6% Vandelay Industries Information

8% Total Assets: 1,000,000

10% Debt-to-Equity Ratio (D/E): 1.5

12% ROA: 9.0%

7. Why is the ROE greater than the ROA if the cost of debt is less than the ROA? Why is the ROE less than the ROA if the cost of debt is greater than the ROA? Why does the ROE equal the ROA if the cost of debt is equal to the ROA? (15 pts.)

(More) Extra credit: Given the relationship between ROA, ROE, and interest rates (the cost of debt), why would a business ever choose to use debt financing if interest rates were greater than their expected ROA?

(up to 3 points)

Balance Sheet
for
Illini Tap
December 31, 2014
ASSETS
CURRENT ASSETS
Cash
Savings & short-term deposits
Marketable securities (at market)
Accounts receivable
Supplies
Inventories:
Raw Inputs
Intermediate Goods
Completed Goods
Cash invested in work in progress
Prepaid expenses
Other current assets – personal
TOTAL CURRENT ASSETS
As of:

NONCURRENT ASSETS
Breeding livestock (at market)
Machinery & equipment (at market)
Investments in capital leased assets
Investments In cooperatives
Investments in other entities
Retirement accounts
Cash value of insurance policies
Long-term financial assets, nonmarketable securities
Land
Buildings
Other noncurrent assets-personal
TOTAL NONCURRENT ASSETS

2013

2014

35,000
50,000

90,300
5,000

0
5,000

13,000
5,000

2013

2014

8,000
10,000
13,000
9,500

9,500
15,000
45,000
2,800

21,000
2,500

34,000
4,800

4,077

10,600

68,077

121,700

210,000

10,000
197,000

1,500

300,000
2,100

TOTAL NONCURRENT LIABILITIES

211,500

509,100

720,000

TOTAL LIABILITIES

279,577

630,800

OWNER EQUITY
Contributed capital
Retained earnings
Valuation equity
TOTAL OWNER EQUITY
TOTAL LIABILITIES & OWNER EQUITY

100,000
66,923
3,500
170,423
450,000

100,000
154,100
4,900
259,000
889,800

16,000

24,000

29,000

32,500

135,000

169,800

250,000

65,000

300,000

70,000

150,000
200,000

315,000

TOTAL ASSETS

450,000

889,800

NOTES to accompany Financial Statements:
Book values (cost less depreciation)
Financial investments
Machinery and equipment
Real-estate land
Real-estate buildings

50,000
260,000

50,000
308,000
160,000
195,000

LIABILITIES AND OWNER EQUITY
CURRENT LIABILITIES
Accounts payable
Credit line, short term notes
Current portion of all term debt
Accrued interest
Accrued expenses
Accrued taxes
Other accrued items
Current portion-deferred taxes
Other current liabilities – personal

TOTAL CURRENT LIABILITIES

NONCURRENT LIABILITIES
Noncurrent portion of term business debt:
Non-real estate debt:
Maturity less than 10 years
Maturity greather than or equal to 10 years
Real estate debt:
Maturity less than 10 years
Maturity greather than or equal to 10 years
Noncurrent portion-deferred taxes
Other noncurrent liabilities – personal

0

Calculation of Deferred Taxes
for
Illini Tap
As of:
December 31, 2013
Market Value

Tax Basis

Difference

Current Portion
Valuation of Specific Current Asset Items
Marketable securities
Inventories
Accounts receivable
Cash invested in work in progress
Prepaid expenses

0
21,000
0
0
29,000

0 =

0
21,000

29,000

1. Excess of Market Value over Tax Basis of Current Assets (Sum)

50,000

Deductions
Accounts payable
Accrued interest
Accrued taxes
Other accrued expenses
2. Total deductions

8,000
9,500
21,000
2,500
41,000

\$

3. Current portion of deferred taxable income [1 -2, zero if negative]

9,000

4. Estimated federal and state income tax rate
5. Deferred federal and state tax expense [3×4]
6. Estimated self-employment tax rate
7. Maximum self-employment payments
8. Deferred self-employment tax [the minimum of 3×6 or 7]
9. Total current portion of deferred income taxes [5+8]

Noncurrent Portion

30%
2,700
15.3%
11,942
1,377
4,077

Market Value

Deferred taxable income from noncurrent assets
Real Estate – Land
Machinery and equipment
Real Estate – Buildings
Other – Investment in Brewery

250,000 65,000 –

10. Noncurrent portion of deferred taxable income [sum, zero if negative]
11. Estimated federal and state income tax rate
12. Total noncurrent portion of deferred taxes [10×11]

=
260,000 =
=
50,000 =

Gain/Loss

0
-10,000
0
15,000
5,000
30%
1,500

Valuation Equity:
Gain/Loss
Machinery and equipment
Real estate and improvements
Personal Assets
Less:
Personal Liabilities
Non Current Deferred Taxes
Other
Total Valuation Equity

Tax Basis

-10,000
15,000

1,500
\$3,500

Calculation of Deferred Taxes
for
Illini Tap
As of:
December 31, 2014
Market Value

Tax Basis

Difference

Current Portion
Valuation of Specific Current Asset Items
Marketable securities
Inventories
Accounts receivable
Cash investment in work in progress
Prepaid expenses

0 29,000
13,000
0
32,500

0 =

0
29,000
13,000
0
32,500

1. Excess of Market Value over Tax Basis of Current Assets (Sum)

74,500

Deductions
Accounts payable
Accrued interest
Accrued taxes
Other accrued expenses
2. Total deductions

9,500
2,800
34,000
4,800
51,100

\$

3. Current portion of deferred taxable income [1 -2, zero if negative]

23,400

4. Estimated federal and state income tax rate
5. Deferred federal and state tax expense [3×4]
6. Estimated self-employment tax rate
7. Maximum self-employment payments
8. Deferred self-employment tax [the minimum of 3×6 or 7]
9. Total current portion of deferred income taxes [5+8]

Noncurrent Portion

30%
7,020
15.3%
12,359
3,580
\$10,600

Market Value

Deferred taxable income from noncurrent assets
Real Estate – Land
Machinery and equipment
Real Estate – Buildings
Other – Investment in Brewery

150,000
300,000
200,000
70,000

10. Noncurrent portion of deferred taxable income [sum, zero if negative]
11. Estimated federal and state income tax rate
12. Total noncurrent portion of deferred taxes [10×11]

160,000
308,000
195,000
50,000

Gain/Loss

=
=
=
=

-10,000
-8,000
5,000
20,000
7,000
30%
\$2,100

Valuation Equity:
Gain/Loss
Machinery and equipment
Real estate and improvements
Personal Assets
Less:
Personal Liabilities
Non Current Deferred Taxes
Other
Total Valuation Equity

Tax Basis

-8,000
-5,000
20,000

2,100
\$4,900

INCOME STATEMENT
for
Homework 4
For the period: January 1, 2014
to: December 31, 2014
Item
Sales
Cash receipts
Inventories
Accounts Receivable

Subtotal

925,000

Line

(1)
(2)

8,000
13,000
Gross revenue

OPERATING AND INTEREST EXPENSES AND ADJUSTMENTS
Operating Expenses:
Cash operating expenses
Accounts payable
Prepaid Expenses
Supplies
Work in progress
Other accrued expenses and items

946,000 >>

(3)
(4)

\$946,000

(5)

700,000
+
+

Depreciation

(6)

1,500
3,500
0
0
2,300

(7)
(8)
(9)
(10)
(11)

32,000

+
Total Interest Expense

(13)

21,500

Interest Expenses:
Amount of interest paid in cash
Accrued interest

(12)

732,300

Total Operating Expense

(14)

-6,700

(15)

14,800

(16)

Gains/losses on sales of capital assets
Gains/losses on sales of nonbusiness assets

(18)

(19)

\$201,900

Net income from operations

(17)

\$3,000

747,100 >>

\$747,100
\$198,900

Total Operating and Interest Expense

(20)

(21)

4,800

(22)
(23)
(24)

4,800 >>

Net income before taxes
Amount of tax paid in cash
Income and social security taxes
Current portion of deferred taxes

\$4,800

(25)

\$206,700

(26)

42,000

(27)

13,000
6,523
Total Tax Expense

NET INCOME

Total

(29)

61,523 >>

(28)

\$61,523

(30)

\$145,177

(31)

t=0

t=1

Crops and Feed

Market Livestock
Feed
culled stock

Raw Inputs
salvaged items

Other Farm Income

Change in cash in growing crops

Change in cash in work in process

Farm

Total farm expenses

Other nonfarm income net of expenses
Gains/losses on sales of nonfarm assets
Total nonfarm income

Gains/losses on sales of nonbusiness assets

STATEMENT OF CASH FLOWS
for
Illini Tap
For the period:
January 1, 2014
to: December 31, 2014
Item
CASH FLOWS FROM OPERATING ACTIVITIES
Inflows
Total cash inflows from operating activities
Outflows
Cash paid for operating expenses
Cash paid for operating & s.t. loan interest
Cash paid for long-term loan interest
Cash paid for purchased inputs
Cash paid for other items purchased for resale
Cash paid for income and social security taxes
Cash withdrawals for owner/family living
Total cash outflows from operating activities
Net cash flows provided by operating activities

Subtotal

925,000
4,800
929,800

Total

>> \$

929,800

>> \$
\$

821,500
108,300

>> \$

60,000

>> \$

415,000

\$

(355,000)

>> \$

325,000

>> \$
\$

23,000
302,000

\$
\$
\$

55,300
35,000
90,300

700,000
1,000
20,500

42,000
58,000
821,500

0

CASH FLOWS FROM INVESTING ACTIVITIES
Inflows
Cash received on sale of machinery/equipment/real estate
Cash received from sale of internally transferred capital
Cash received from withdrawals of savings
Cash received from sale of personal assets/retirement accts.
Total cash inflows from investing activities
Outflows
Cash paid to purchase machinery/equipment/real estate
Cash paid to purchased productive capital items
Cash paid for deposits to savings accounts
Cash paid to purchase marketable securities
Cash paid to purchase personal assets/retirement accts.
Total cash outflows from investing activities

10,000
50,000
60,000
410,000
5,000

415,000

Net cash flows provided by investing activities

CASH FLOWS FROM FINANCING ACTIVITIES
Inflows
Proceeds from operating loans and short-term notes
Proceeds from term debt financing
Total cash inflows from financing activities
Outflows
Cash repayment of operating and short-term loans
Cash repayment of term debt-scheduled
Cash repayment of term debt-unscheduled
Cash repayment of capital leases
Cash payments of dividends and other capital distributions
Total cash outflows from financing activities
Net cash flows provided by financing activities

Net increase (decrease) in cash flows
Beginning of year cash balance
End of year cash balance

15,000
310,000
0
325,000
10,000
13,000

23,000

Table 3.9 Consolidated statement of cash flows for Joseph Farmer, 1994.
STATEMENT OF CASH FLOWS
for
0
#
Item
CASH FLOWS FROM OPERATING ACTIVITIES
Inflows
Cash received from farm production and govt. payments
Cash received from net nonfarm income
Total cash inflows from operating activities
Outflows
Cash paid for operating expenses
Cash paid for operating & s.t. loan interest
Cash paid for term loan interest
Cash paid for feed & market livestock
Cash paid for other items purchased for resale
Cash paid for income and social security taxes
Cash withdrawals for family living
Total cash outflows from operating activities
Net cash flows provided by operating activities
CASH FLOWS FROM INVESTING ACTIVITIES
Inflows
Cash received on sale of machinery/equipment/real estate
Cash received from sale of breeding livestock
Cash received from withdrawals of savings
Cash received from sale of personal assets/retirement accts.
Total cash inflows from investing activities
Outflows
Cash paid to purchase machinery/equipment/real estate
Cash paid for purchase of breeding livestock
Cash paid for deposits to savings accounts
Cash paid to purchase marketable securities
Cash paid to purchase personal assets/retirement accts.

Subtotal

Total

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Total cash outflows from investing activities
Net cash flows provided by investing activities

CASH FLOWS FROM FINANCING ACTIVITIES
Inflows
Proceeds from operating loans and short-term notes
Proceeds from term debt financing
Total cash inflows from financing activities
Outflows
Cash repayment of operating and short-term loans
Cash repayment of term debt-scheduled
Cash repayment of term debt-unscheduled
Cash repayment of capital leases
Cash payments of dividends and other capital distributions
Total cash outflows from financing activities
Net cash flows provided by financing activities
Net increase (decrease) in cash flows
Beginning of year cash balance
End of year cash balance

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Table 3.14 Pro forma statement of cash flows for Joseph Farmer, 1994.
PRO FORMA STATEMENT OF CASH FLOWS
for
0
#
Item
CASH FLOWS FROM OPERATING ACTIVITIES
Inflows
Cash received from farm production and govt. payments
Cash received from net nonfarm income
Total cash inflows from operating activities
Outflows
Cash paid for operating expenses
Cash paid for operating & s.t. loan interest
Cash paid for term loan interest
Cash paid for feed & market livestock
Cash paid for other items purchased for resale
Cash paid for income and social security taxes
Cash withdrawals for family living
Total cash outflows from operating activities
Net cash flows provided by operating activities
CASH FLOWS FROM INVESTING ACTIVITIES

Subtotal

Total

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Inflows
Cash received on sale of machinery/equipment/real estate
Cash received from sale of breeding livestock
Cash received from withdrawals of savings
Cash received from sale of personal assets/retirement accts.
Total cash inflows from investing activities
Outflows
Cash paid to purchase machinery/equipment/real estate
Cash paid for purchase of breeding livestock
Cash paid for deposits to savings accounts
Cash paid to purchase marketable securities
Cash paid to purchase personal assets/retirement accts.
Total cash outflows from investing activities
Net cash flows provided by investing activities

CASH FLOWS FROM FINANCING ACTIVITIES
Inflows
Proceeds from operating loans and short-term notes
Proceeds from term debt financing
Total cash inflows from financing activities
Outflows
Cash repayment of operating and short-term loans
Cash repayment of term debt-scheduled
Cash repayment of term debt-unscheduled
Cash repayment of capital leases
Cash payments of dividends and other capital distributions
Total cash outflows from financing activities
Net cash flows provided by financing activities
Net increase (decrease) in cash flows
Beginning of year cash balance
End of year cash balance

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STATEMENT OF CASH FLOWS
for
0
#
Item
CASH FLOWS FROM OPERATING ACTIVITIES
Inflows
Cash received from farm production and govt. payments
Cash received from net nonfarm income
Total cash inflows from operating activities
Outflows
Cash paid for operating expenses
Cash paid for operating & s.t. loan interest
Cash paid for term loan interest
Cash paid for feed & market livestock
Cash paid for other items purchased for resale

Subtotal

Total

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0

Cash paid for income and social security taxes
Cash withdrawals for family living
Total cash outflows from operating activities
Net cash flows provided by operating activities
CASH FLOWS FROM INVESTING ACTIVITIES
Inflows
Cash received on sale of machinery/equipment/real estate
Cash received from sale of breeding livestock
Cash received from withdrawals of savings
Cash received from sale of personal assets/retirement accts.
Total cash inflows from investing activities
Outflows
Cash paid to purchase machinery/equipment/real estate
Cash paid for purchase of breeding livestock
Cash paid for deposits to savings accounts
Cash paid to purchase marketable securities
Cash paid to purchase personal assets/retirement accts.
Total cash outflows from investing activities
Net cash flows provided by investing activities

CASH FLOWS FROM FINANCING ACTIVITIES
Inflows
Proceeds from operating loans and short-term notes
Proceeds from term debt financing
Total cash inflows from financing activities
Outflows
Cash repayment of operating and short-term loans
Cash repayment of term debt-scheduled
Cash repayment of term debt-unscheduled
Cash repayment of capital leases
Cash payments of dividends and other capital distributions
Total cash outflows from financing activities
Net cash flows provided by financing activities
Net increase (decrease) in cash flows
Beginning of year cash balance
End of year cash balance

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STATEMENT OF CASH FLOWS
for
Joseph Farmer
For the period: January 1, 19xx to December 31, 19X1.
Item
CASH FLOWS FROM OPERATING ACTIVITIES
Cash received from farm production and govt. payments

Subtotal
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Total

Cash received from net nonfarm income
Cash paid for operating expenses
Cash paid for operating & s.t. loan interest
Cash paid for term loan interest
Cash paid for feed & market livestock
Cash paid for other items purchased for resale
Cash paid for income and social security taxes
Net cash income
Cash withdrawals for family living
Net cash flows provided by operating activities
CASH FLOWS FROM INVESTING ACTIVITIES
Cash received on sale of machinery/equipment/real estate
Cash received from sale of breeding livestock
Cash received from withdrawals of savings
Cash received from sale of personal assets/retirement accts.
Cash paid to purchase machinery/equipment/real estate
Cash paid for futures market deposits
Cash paid for purchase of breeding livestock
Cash paid for deposits to savings accounts
Cash paid to purchase marketable securities
Cash paid to purchase personal assets/retirement accts.
Net cash flows provided by investing activities
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from operating loans and short-term notes
Proceeds from term debt financing
Cash repayment of operating and short-term loans
Cash repayment of term debt-scheduled
Cash repayment of term debt-unscheduled
Cash repayment of capital leases
Cash payments of dividends and other capital distributions
Net cash flows provided by financing activities
Net increase (decrease) in cash flows
Beginning of year cash and equivalents
End of year cash and equivalents

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STATEMENT OF OWNER EQUITY
for
Illini Tap
For the period:
January 1, 2014
to: December 31, 2014

Excess of Market over Book Values (Market – Book)

Item

Subtotal

Total

Item:
Machinery and Equipment

Beginning of period owner equity

\$

170,423

a

Land
Buildings

Changes in contributed capital and retained earnings:

Other Investments (local brewery)

Net Income
Withdrawals owner/family living

145,177

c

Capital Contributions:

Current Deferred Taxes
+

d

Non-current Deferred Taxes

+

e

Non-real estate long-term debt

Inheritances

+

f

Total Equity

g

Other Information:
2013 Net Income for Illini Tap was:
2014 capital contributions/distributions

Total change in contributed capital and retained earnings

\$

Change in market valuation (market value over cost/basis) of:
Marketable securities
\$
Investments held
Machinery and equipment
Land
Buildings
Other capital assets
Personal assets
Personal liabilities
Total change in market valuation
\$
Change in noncurrent portion of deferred taxes

Total change in valuation equity
Total Change in Owner Equity
End of period owner equity

=

\$4,077
\$1,500
\$210,000
\$170,423

\$10,600
\$2,100
\$207,000
\$259,000

Change
\$2,000
-\$10,000
\$5,000
\$5,000

Selected Account Balances:

Debt forgiveness

Capital Distributions:
Dividends
Inheritances

12/31/2014
-\$8,000
-\$10,000
\$5,000
\$20,000

b

58,000

1/1/2014
-\$10,000
\$0
\$0
\$15,000

h
i

87,177 >\$

87,177

j

k

5,000
2,000
-10,000
5,000

l
m
n
o
p
q
r

2,000

s

600

t

1,400 >\$

1,400
88,577
259,000

u
v
w

\$145,177
\$0

\$600
\$88,577

2013

2014

Current Ratio
Working Capital
Working Capital Ratio
Debt-to-Asset Ratio
Debt-to Equity Ratio
Equity-to-Asset Ratio
Return on Assets

n/a

Return on Equity

n/a

Operating Profit Margin

n/a

Asset Turnover Ratio

n/a

Repayment Capacity

n/a

\$116,177

Repayment Margin

n/a

\$56,177

Coverage Ratio

n/a

1.77

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