02 Jan 21. Calculating Cash Flows

Chapter 1

Concept Questions:

2. Sole Proprietorships and Partnerships [LO3] What are the four primary disadvantages of the sole proprietorship and partnership forms of business organization? What benefits are there to these types of business organization as opposed to the corporate form?

3. Corporations [LO3] What is the primary disadvantage of the corporate form of organization? Name at least two advantages of corporate organization.

6. Goal of Financial Management [LO2] What goal should always motivate the actions of a firm’s financial manager?

7. Agency Problems [LO4] Who owns a corporation? Describe the process whereby the owners control the firm’s management. What is the main reason that an agency relationship exists in the corporate form of organization? In this context, what kinds of problems can arise?

11. Goal of the Firm [LO2] Evaluate the following statement: Managers should not focus on the current stock value because doing so will lead to an overemphasis on short-term profits at the expense of long-term profits.

14. Agency Problems [LO4] Suppose you own stock in a company. The current price per share is $25. Another company has just announced that it wants to buy your company and will pay $35 per share to acquire all the outstanding stock. Your company’s management immediately begins fighting off this hostile bid. Is management acting in the shareholders’ best interests? Why or why not?

Chapter 2

Concept Questions:

1. Liquidity [LO1] What does liquidity measure? Explain the trade-off a firm faces between high liquidity and low liquidity levels.

2. Accounting and Cash Flows [LO2] Why might the revenue and cost figures shown on a standard income statement not be representative of the actual cash inflows and outflows that occurred during a period?

4. Operating Cash Flow [LO4] In comparing accounting net income and operating cash flow, name two items you typically find in net income that are not in operating cash flow. Explain what each is and why it is excluded in operating cash flow.

6. Cash Flow from Assets [LO4] Suppose a company’s cash flow from assets is negative for a particular period. Is this necessarily a good sign or a bad sign?

8. Net Working Capital and Capital Spending [LO4] Could a company’s change in NWC be negative in a given year? (Hint: Yes.) Explain how this might come about. What about net capital spending?

1. Building a Balance Sheet [LO1]KCCO, Inc., has current assets of $5,300, net fixed assets of $24,900, current liabilities of $4,600, and long-term debt of $10,300. What is the value of the shareholders’ equity account for this firm? How much is net working capital?

7. Calculating OCF [LO4]Ridiculousness, Inc., has sales of $43,800, costs of $22,700, depreciation expense of $2,100, and interest expense of $1,600. If the tax rate is 35 percent, what is the operating cash flow, or OCF?

8. Calculating Net Capital Spending [LO4]Bowyer Driving School’s 2014 balance sheet showed net fixed assets of $2.7 million, and the 2015 balance sheet showed net fixed assets of $3.5 million. The company’s 2015 income statement showed a depreciation expense of $328,000. What was net capital spending for 2015?

9. Calculating Additions to NWC [LO4]The 2014 balance sheet of Steelo, Inc., showed current assets of $4,630 and current liabilities of $2,190. The 2015 balance sheet showed current assets of $5,180 and current liabilities of $2,830. What was the company’s 2015 change in net working capital, or NWC?

16. Preparing a Balance Sheet [LO1]Prepare a 2015 balance sheet for Cornell Corp. based on the following information: cash = $134,000; patents and copyrights = $670,000; accounts payable = $210,000; accounts receivable = $105,000; tangible net fixed assets = $1,730,000; inventory = $293,000; notes payable = $160,000; accumulated retained earnings = $1,453,000; long-term debt = $845,000.

21. Calculating Cash Flows [LO2]Quarles Industries had the following operating results for 2015: sales = $30,096; cost of goods sold = $21,476; depreciation expense = $5,341; interest expense = $2,409; dividends paid = $1,716. At the beginning of the year, net fixed assets were $18,018, current assets were $6,336, and current liabilities were $3,564. At the end of the year, net fixed assets were $22,176, current assets were $7,829, and current liabilities were $4,159. The tax rate for 2015 was 35 percent.

a. What is net income for 2015?

b. What is the operating cash flow for 2015?

c. What is the cash flow from assets for 2015? Is this possible? Explain.

d. If no new debt was issued during the year, what is the cash flow to creditors? What is the cash flow to stockholders? Explain and interpret the positive and negative signs of your answers in (a) through (d).