P4–5 Classifying inflows and outflows of cash Classify each of

| June 14, 2016

Question
P4–5 Classifying inflows and outflows of cash Classify each of the following items as an inflow (I) or an outflow (O) of cash, or as neither (N).

P4–6 Finding operating and free cash flows Consider the following balance sheets and selected data from the income statement of Keith Corporation.
a. Calculate the firm’s net operating profit after taxes (NOPAT) for the year ended December 31, 2015, using Equation 4.1.
b. Calculate the firm’s operating cash flow (OCF) for the year ended December 31, 2015, using Equation 4.3.
c. Calculate the firm’s free cash flow (FCF) for the year ended December 31, 2015, using Equation 4.4.
d. Interpret, compare, and contrast your cash flow estimates in parts b and c.

P4–9 Cash budget: Basic Grenoble Enterprises had sales of $50,000 in March and $60,000 in April. Forecast sales for May, June, and July are $70,000, $80,000, and $100,000, respectively. The firm has a cash balance of $5,000 on May 1 and wishes to maintain a minimum cash balance of $5,000. Given the following data, prepare and interpret a cash budget for the months of May, June, and July.
(1) The firm makes 20% of sales for cash, 60% are collected in the next month, and the remaining 20% are collected in the second month following sale.
(2) The firm receives other income of $2,000 per month.
(3) The firm’s actual or expected purchases, all made for cash, are $50,000, $70,000, and $80,000 for the months of May through July, respectively.
(4) Rent is $3,000 per month.
(5) Wages and salaries are 10% of the previous month’s sales.
(6) Cash dividends of $3,000 will be paid in June.
(7) Payment of principal and interest of $4,000 is due in June.
(8) A cash purchase of equipment costing $6,000 is scheduled in July.
(9) Taxes of $6,000 are due in June.

P4–15 Pro forma income statement The marketing department of Metroline Manufacturing estimates that its sales in 2016 will be $1.5 million. Interest expense is expected to remain unchanged at $35,000, and the firm plans to pay $70,000 in cash dividends during 2016. Metroline Manufacturing’s income statement for the year ended December 31, 2015, and a breakdown of the firm’s cost of goods sold and operating expenses into their fixed and variable components are given below.
a. Use the percent-of-sales method to prepare a pro forma income statement for the year ended December 31, 2016.
b. Use fixed and variable cost data to develop a pro forma income statement for the year ended December 31, 2016.
c. Compare and contrast the statements developed in parts a and b. Which statement probably provides the better estimate of 2016 income? Explain why.

P4–18 Pro forma balance sheet Peabody & Peabody has 2015 sales of $10 million. It wishes to analyze expected performance and financing needs for 2017, which is 2 years ahead. Given the following information, respond to parts a and b.
(1) The percents of sales for items that vary directly with sales are as follows: Accounts receivable, 12% Inventory, 18% Accounts payable, 14% Net profit margin, 3%
(2) Marketable securities and other current liabilities are expected to remain unchanged.
(3) A minimum cash balance of $480,000 is desired.
(4) A new machine costing $650,000 will be acquired in 2016, and equipment costing $850,000 will be purchased in 2017. Total depreciation in 2016 is forecast as $290,000, and in 2017 $390,000 of depreciation will be taken.
(5) Accruals are expected to rise to $500,000 by the end of 2017.
(6) No sale or retirement of long-term debt is expected.
(7) No sale or repurchase of common stock is expected.
(8) The dividend payout of 50% of net profits is expected to continue.
(9) Sales are expected to be $11 million in 2016 and $12 million in 2017.
(10) The December 31, 2015, balance sheet follows.
a. Prepare a pro forma balance sheet dated December 31, 2017.
b. Discuss the financing changes suggested by the statement prepared in part a.

P4-5
Item
Cash
Accounts Payable
Notes Payable
Long-term Debt
Inventory
Fixed Assets

Change($) Item
100 Accounts Receivable
-1,000 Net Profits
500 Depreciation
-2,000 Repurchase of Stock
200 Cash Dividends
400 Sale of Stock

Change ($)
-700
600
100
600
800
1,000

P4-6
Keith Corporation Balance Sheets
Assets
Cash
Marketable Securities
Accounts Receivable
Inventories
Total Current Assets
Gross Fixed Asstes
Less: Accumulated Depreciation
Net Fixed Assets
Total Assets

31-Dec
2015
$1,500
1,800
2,000
2,900
$8,200
$29,500
14,700
$14,800
$23,000

2014
$1,000
1,200
1,800
2,800
$6,800
$28,100
13,100
$15,000
$21,800

Liabilities and Stockholders’ Equity
Accounts Payable
Notes Payable
Accruals
Total Current Liabilities
Long-term Debt
Total Liabilities
Common Stock
Retained Earnings
Total Stockholders’ Equity
Total Liabilities and Stockholders’ Equity

$1,600
2,800
200
$4,600
5,000
$9,600
$10,000
3,400
$13,400
$23,000

$1,500
2,200
300
$4,000
5,000
$9,000
$10,000
2,800
$12,800
$21,800

Keith Corporation Income Statement Date (2015)
Depreciation Expense
$1,600
Earnings Before Interest and Taxes (EBIT)
2,700
Interest Expense
367
Net Profits after Taxes
1,400
Tax rate
40%

P4-9

P4-15
Metroline Manufacturing
Income Statement for the Year Ended December 31, 2015

Metroline Manufacturing Breakdown of Costs and Expe
For the Year Ended December 31, 2015

Sales Revenue
Less: Cost of Goods Sold
Gross Profits
Less: Operating Expenses
Operating Profits
Less: Interest Expense
Net Profits before Taxes
Less: Taxes (rate = 40%)
Net Profits after Taxes
Less: Cash Dividends
To Retained Earnings

Cost of goods sold
Fixed Cost
Variable Cost
Total Costs
Operating Expenses
Fixed Expenses
Variable Expenses
Total Expenses

$1,400,000
910,000
$490,000
120,000
$370,000
35,000
$335,000
134,000
$201,000
66,000
$135,000

210,000
$700,000
$910,000
$36,000
84,000
$120,000

d Expenses Into Fixed and Variable Components

P4-18
Peabody & Peabody Balance Sheet December 31, 2015 ($000)
Assets
Liabilities and Stockholders’ Equity
Cash
$400 Accounts Payable
Marketable Securities
200 Accruals
Accounts Receivable
1,200 Other Current Liabilities
Inventories
1,800
Total Current Liabilities
Total Current Assets
$3,600 Long-term Debt
Net Fixed Assets
4,000
Total Liabilities
Total Assets
$7,600 Common Equity
Total Liabilities and Stockholders’ Equity

$1,400
400
80
$1,880
2,000
3,880
3,720
$7,600

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