SITUATION
At the beginning of f2007 mary Abrahams purchased a small business the turpen company whose income statement and balance are shown below:
Income Statement for the Tureen Company for 2007
|
Sales revenue
Cost of goods sold Gross profit
Operating expenses:
|
|
$175,000
105,000
|
|
70,000
|
|
Depreciation
|
$ 5.000
|
|
|
Administrative expenses
|
20,000
|
|
|
Selling expenses
|
26 000
|
|
|
Total operating expenses
|
|
51,000
|
|
Operating Income
|
|
19,000
|
|
interest expense
|
|
3,000
|
|
Earnings before taxes
|
|
16,000
|
|
Taxes
|
|
8,000
|
|
Net income
|
|
8,000
|
Balance Sheets for the Turpen Company for 2006 and 2007
|
|
2006
|
2007
|
|
Assets
|
|
|
|
Current assets:
|
|
|
|
Cash
|
8,000
|
10,000
|
|
Accounts receivable
|
15,000
|
20,000
|
|
Inventories
|
22,000
|
25,000
|
|
Total current assets
|
$45,000
|
$ 55,000
|
|
Axed assets:
|
|
|
|
Gross fixed assets
|
$50,000
|
$ 55,000
|
|
Accumulated depreciation
|
(15,000)
|
(20,000)
|
|
Net fixed assets
|
$35,000
|
$ 35,000
|
|
Other assets
|
12,000
|
10,000
|
|
TOTAL ASSETS
|
$92,000
|
$100,000
|
|
Debt (weenies) and Equity
|
|
|
|
Current debt:
|
|
|
|
Accounts payable
|
$10,000
|
$ 12,000
|
|
Accruals
|
7,000
|
8,000
|
|
Shorttenn notes
|
5,000
|
5,000
|
|
Total current debt
|
$22,000
|
25,000
|
|
longterm debt
|
15,000
|
15,000
|
|
Total debt
|
$37,000
|
$ 40,000
|
|
Equity
|
$ 55,000
|
$ 60,000
|
|
TOTAL DEBT AND EQUITY
|
$92,000
|
$100,000
|
The arm has been profitable, but Abrahams has been disappointed by the lack of cash flows. She had hoped to have about 510.000 a year available for Personal Wing expenses. However, there never seems to be much cash available for purposes other than business needs. Abrahams has asked you to examine the finan dal statements and explain why, although they shOw profits. she does not have any discretionary cash for personal needs. She observed, "I thought that I could take the profits and add depreciation to find out how much cash I was generating. However, that doesn't seem to be the case. What's happening?"
1 Given the information provided by the financial statements, what would you tell Abrahams? (As part of your answer, calculate the firm's cash flows.)
2. How would you describe the cash flow pattern for the Torben Company?