To calculate: The cash flow from assets, the cash flow to creditors, and the cash flow to stockholders for the year 2011
Introduction:
The cash flow refers to the difference between the money that comes in and goes out of the firm. The cash flow from assets refers to the difference between the revenues from the sale of assets and the money invested in purchasing the assets
The cash flow to the creditors refers to the interest paid to the creditors minus the net fresh debt borrowed by the company. The cash flow to the stockholders refers to the dividend paid to the shareholders of the company minus the fresh equity raised by the company.
Answer to Problem 26QP
The cash flow from assets for the year 2011 is ($1,886.62). The cash flow to creditors for the year 2011 is ($3,450). The cash flow to stockholders’ for the year 2011 is $1,560.38.
Explanation of Solution
Given information:
Particulars | 2010 | 2011 |
Sales | $11,573 | $12,936 |
Cost of goods sold | $3,979 | $4,707 |
Other expenses | $946 | $824 |
$1,661 | $1,736 | |
Interest | $776 | $926 |
Dividends | $1,411 | $1,618 |
Cash | $6,067 | $6,466 |
Accounts receivable | $8,034 | $9,427 |
Inventory | $14,283 | $15,288 |
Net fixed assets | $50,888 | $54,273 |
Accounts payable | $4,384 | $4,644 |
Short-term notes payable | $1,171 | $1,147 |
Long-term debt | $20,320 | $24,696 |
Prepare the income statement for 2010:
Company T | ||
Income statement for the year 2010 | ||
Particulars | Amount | Amount |
Net sales | $11,573.00 | |
Less: | ||
Costs | $3,979.00 | |
Other expenses | $946.00 | |
Depreciation | $1,661.00 | $6,586.00 |
Earnings before interest and taxes | $4,987.00 | |
Less: Interest paid | $776.00 | |
Taxable income | $4,211.00 | |
Less: Taxes ($4,211×34%) | $1,431.74 | |
Net income (A) | $2,779.26 | |
Dividends (B) | $1,411.00 | |
Addition to |
$1,368.26 |
Hence, the net income for 2010 is $2,779.26.
Prepare the income statement for 2011:
Company T | ||
Income statement for the year 2011 | ||
Particulars | Amount | Amount |
Net sales | $12,936.00 | |
Less: | ||
Costs | $4,707.00 | |
Other expenses | $824.00 | |
Depreciation | $1,736.00 | $7,267.00 |
Earnings before interest and taxes | $5,669.00 | |
Less: Interest paid | $926.00 | |
Taxable income | $4,743.00 | |
Less: Taxes ($4,743×34%) | $1,612.62 | |
Net income (A) | $3,130.38 | |
Dividends (B) | $1,618.00 | |
Addition to retained earnings (A)−(B) | $1,512.38 |
Hence, the net income for 2011 is $3,130.38.
Prepare the balance sheet for 2010:
Company T | |||
Balance sheet | |||
For the year 2010 | |||
Assets | Amount | Liabilities | Amount |
Current assets | Current liabilities | ||
Cash | $6,067.00 | Accounts payable | $4,384.00 |
Accounts receivable | $8,034.00 | Short-term notes payable | $1,171.00 |
Inventory | $14,283.00 | Total | $5,555.00 |
Total (A) | $28,384.00 | ||
Long-term debt | $20,320.00 | ||
Fixed assets | |||
Tangible net fixed assets (B) | $50,888.00 | Shareholders' equity | |
Common stock (Balance) | $52,028.74 | ||
Addition to Retained earnings | $1,368.26 | ||
Total | $53,397.00 | ||
Total assets (A)+(B) | $79,272.00 | Total liabilities and shareholders' equity | $79,272.00 |
Hence, the total assets of Company T is 2010 is $79,272.
Compute the common stock for 2010:
Hence, the common stock of Company T for 2010 is $52,028.74.
Prepare the balance sheet for 2011:
Company T | |||
Balance sheet | |||
For the year 2011 | |||
Assets | Amount | Liabilities | Amount |
Current assets | Current liabilities | ||
Cash | $6,466.00 | Accounts payable | $4,644.00 |
Accounts receivable | $9,427.00 | Short-term notes payable | $1,147.00 |
Inventory | $15,288.00 | Total | $5,791.00 |
Total (A) | $31,181.00 | ||
Long-term debt | $24,696.00 | ||
Fixed assets | |||
Tangible net fixed assets (B) | $54,273.00 | Shareholders' equity | |
Common stock (Balance) | $52,086.36 | ||
Addition to Retained earnings | $2,880.64 | ||
Total | $54,967.00 | ||
Total assets (A)+(B) | $85,454.00 | Total liabilities and shareholders' equity | $85,454.00 |
Hence, the total assets of Company T is 2011 is $85,454.
Compute the retained earnings for 2011:
Hence, the retained earnings of Company T for 2011 are $2,880.64.
Compute the common stock for 2011:
Hence, the common stock of Company T for 2011 is $52,086.36.
Formulae:
The formula to calculate the net new borrowing and the cash flow to creditors:
The formula to calculate the new equity raised and the cash flow to stockholders:
The formula to calculate the cash flow from assets:
Compute the net new borrowing at the end of 2011:
The long-term debt in the balance sheet of Company T in 2010 was $20,320. The company had long-term debt worth $24,696 in 2011.
Hence, the net new borrowing is $4,376.
Compute the cash flow to creditors in 2011:
The interest expense of Company T in 2011 was $926.
Hence, the cash flow to creditors is ($3,450).
Compute the net new equity raised in 2011:
The common equity in 2010 is 52,028.74 (Refer to the balance sheet of 2010 in the solution) and the common equity in 2011 is $52,086.36 (Refer to the balance sheet of 2011 in the solution).
Hence, the net new equity raised is $57.62.
Compute the cash flow to stockholders’ in 2011:
The company paid $1,618 as dividends in the year 2011.
Hence, the cash flow to stockholders’ is $1,560.38.
Compute the cash flow from assets:
Hence, the cash flow from assets is ($1,889.62).
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