Module : Critical Thinking Assignment
Understanding Financial Statements and Cash Flow
Complete the following problems. 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
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Cash
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75,000
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Account receivables
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64,050
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Accounts payable
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34,500
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Short-term notes payable
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15,750
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Inventories
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60,000
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Gross fixed assets
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1,920,000
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Other current assets
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7,500
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Accumulated depreciation
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468,000
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Long-term debt
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300,000
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Common stock
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735,000
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Other assets
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22,500
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Retained earnings
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?
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Solution
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Balance Sheet:
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Cash
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Accounts receivable
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Inventories
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Other current assets
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Total current assets
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Gross Buildings and equipment
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Accumulated Depreciation
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Net fixed assets
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Other assets
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Total assets
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Notes payable
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Accounts payable
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Total current liabilities
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Long-term debt
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Total Liabilities
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Common Stock
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Retained earnings
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Total equity
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Total liabilities and equity
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Net Working Capital =
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Debt Ratio =
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Problem 3-2: Computing Cash Flows
Given the following information, prepare a statement of cash flows.
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DATA
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Increase in accounts receivable
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75
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Increase in inventories
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90
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Operating Income
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225
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Interest Expense
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75
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Increase in accounts payable
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75
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Dividends
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45
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Increase in common stock
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60
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Increase in net fixed assets
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69
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Depreciation Expense
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36
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Income taxes
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51
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Beginning cash
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60
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Solution
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Cash Flows from Operating Activities
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*Net Income
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Adjustments:
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Depreciation
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Increase in accounts receivable
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Increase in inventories
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Increase in account payable
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Net Cash provided by operating activities
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Cash Flows from Investing Activities
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**Increase in gross fixed assets
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Cash Flows from Financing Activities
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Increase in common stock
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Dividends
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Net cash provided by financing activities
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Decrease in Cash
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Beginning Cash
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Ending cash
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*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.
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DATA
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Increase in inventories
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17,500
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Operating income
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547,500
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Dividends
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72,500
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Increase in accounts payables
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107,500
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Interest expense
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112,500
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Increase in common stock
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12,500
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Depreciation expense
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42,500
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Increase in accounts receivable
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172,500
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Increase in long-term debt
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132,500
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Increase in short-term notes payable
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37,500
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Increase in gross fixed assets
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135,000
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Increase in paid in capital
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50,000
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Income taxes
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112,500
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Beginning cash
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625,000
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Solution
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Cash Flows from Operating Activities
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Net Income
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Adjustments:
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Depreciation
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Increase in accounts receivable
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Increase in inventories
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Increase in account payable
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Net Cash provided by operating activities
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Cash Flows from Investing Activities
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Increase in plant and equipment
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Cash Flows from Financing Activities
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Increase in notes payable
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Increase in long-term debt
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Issued new common stock
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Dividends
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Net cash provided by financing activities
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Net Decrease in cash
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Beginning cash
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Ending cash
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Problem 3-4: Ratio Analysis
The Balance Sheet and Income Statement for Saudi Manufacturing Corporation are as follows:
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DATA
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Balance Sheet:
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Cash
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22,500
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Acct/Rec
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90,000
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Inventories
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45,000
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Current assets
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157,500
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Net fixed assets
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202,500
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Total assets
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360,000
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Accts/Pay
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49,500
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Accrued expenses
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27,000
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Short-term N/P
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13,500
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Current liabilities
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90,000
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Long-term debt
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90,000
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Owner's equity
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180,000
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Total liabilities and owners' equity
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360,000
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Income Statement:
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Net sales
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360,000
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COGS
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148,500
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Gross profit
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211,500
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Operating expenses
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135,000
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Net operating income
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76,500
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Interest expense
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16,515
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EBT
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59,985
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Income taxes
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23,985
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Net income
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36,000
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Solution
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Calculate the following ratios:
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Current ratio =
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Debt ratio =
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Times interest earned =
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Average collection period =
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Inventory turnover =
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Fixed asset turnover =
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Total asset turnover =
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Operating profit margin =
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Operating return on assets =
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Return on equity =
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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.
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DATA
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Price/earnings ratio
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18.69X
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Earnings per share (SAR)
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2.65
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Equity book value (SAR)
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12.67
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Solution
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a. Price per share
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b. Price/book ratio
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Problem 3-6: Computing Ratios
Use the information from the balance sheet and income statement below to calculate the ratios listed below:
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DATA
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ASSETS
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Cash
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250,000
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Accounts receivable
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75,000
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Inventory
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125,000
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Prepaid expenses
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25,000
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Total current assets
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475,000
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Gross plant and equipment
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1,002,500
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Accumulated depreciation
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-165,000
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Net plant and equipment
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837,500
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Total assets
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1,312,500
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DEBT AND EQUITY
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Accounts payable
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225,000
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Accrued liabilities
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157,500
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Total current debt
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382,500
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Long-term debt
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300,000
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Common stock
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512,500
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Retained earnings
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117,500
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Total debt and equity
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1,312,500
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Sales
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525,000
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Cost of goods sold
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-225,000
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Gross profit
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300,000
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Selling, general, and administrative expenses
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-72,500
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Depreciation expense
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-65,000
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Operating income
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162,500
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Interest expense
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-20,000
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Earnings before taxes
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142,500
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Taxes
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-40,000
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Earnings available to common shareholders
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102,500
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Solution
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RATIOS
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Current ratio
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Acid-test ratio
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Times interest earned
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Inventory turnover
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Total asset turnover
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Operating profit margin
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Days in receivables
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Operating return on assets
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Debt ratio
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Fixed asset turnover
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Return on equity
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