The effect of expansion of the after-tax operating income, sales, net income and net operating working capital. Operating Income: The operating income refers to that income which is the net income of a business, excluding the financial effects and taxes. Net Operating Working Capital: It is a fiscal tool to measure the working liquidity of the business. It is calculated by subtracting the operating current assets which do not include interest from the operating liabilities which also not include interest. Net Income: It is the total earnings of the business which is derived from deducting all the interest and taxes from the income.

Question

Want to see more full solutions like this?

Answer 1

Question

Definition Definition Tax imposed by the government on the "gain" or increase in the value of an asset at the time of its sale by the owner. Capital gain is computed based on the purchase price and sale price of the asset. If the sale price of the asset is more than the purchase price, there is a gain on the sale of asset. A tax is imposed on such gain in accordance with the applicable tax rates at the time of sale.

Chapter 3, Problem 20IC

a.

Summary Introduction

To determine: The effect of expansion of the after-tax operating income, sales, net income and net operating working capital.

Operating Income:

The operating income refers to that income which is the net income of a business, excluding the financial effects and taxes.

Net Operating Working Capital:

It is a fiscal tool to measure the working liquidity of the business. It is calculated by subtracting the operating current assets which do not include interest from the operating liabilities which also not include interest.

Net Income:

It is the total earnings of the business which is derived from deducting all the interest and taxes from the income.

a.

Expert Solution

Explanation of Solution

Calculation of the effect on net income:

The formula to calculate the effect on net income is as follows:

(Effect on net income)=[(Net income of 2018)−(Net income of 2017)]

Substitute ($160,176) for net income of 2018 and $87,960 for net income of 2017 in the above formula.

(Effect on net income)=[(−$160,176)−$87,960]=−$248,136

The net income decreases by $248,136.

Calculation of after-tax operating income of 2018,

After-tax operating income=EBIT(1−Tax rate)=−$130,948(1−0.4)=−$78,569

The after-tax operating income of 2018 is ($78,569).

Calculation of after-tax operating income of 2017,

After-tax operating income=EBIT(1−Tax rate)=$190,248(1−0.4)=$114,149

The after-tax operating income for2017 is $114,149.

Calculation of net-operating working capital of 2018,

(Net-operatingworking capital)=[(Current assets−Excess cash)−(Current liabilities−Notes payable)]=($1,926,802−$7,282)−($1,650,568−$636,808)=$1,919,520−1,013,760=$905,760

The net operating working capital of 2018 is $905,760.

Calculation of net-operating working capital of 2017,

(Net-operatingworking capital)=[(Current assets−Excess cash)−(Current liabilities−Notes payable)]=($1,124,000−$57,600)−($481,600−$200,000)=$1,066,400−$281,600=$784,800

The net operating working capital of 2017 is $784,800.

Conclusion:

Hence, the net operating working capital increases by $120,960 and the net income decreases by $248,136.

b.

Summary Introduction

To determine: The effect of the expansion on the free cash flow.

Free Cash Flow:

It refers to that cash, which a company can produce after expansion. This is a degree of financial performance of a firm.

b.

Expert Solution

Explanation of Solution

Calculation of the effect on the free cash flow:

The formula to calculate the effect on free cash flow of 2016 is as follows:

Free cash flow=[After-tax operating income+Depreciation]−[Capital expenditures+(Difference in net-operatingworking capital)]

Substitute ($78,569) for after-tax operating income, $116,960 for depreciation, $711,950 for the capital expenditures and $70,642 for the difference in the net operating working capital in the above formula.

Free cash flow=[−$78,569+$116,960]−[$711,950+$120,960]=$38,391−$832910=−$794,519

The free cash flow in 2018 is ($794,519).

Conclusion

Hence, the expansion showsnegative cash flow of ($794,519) which means that the shareholder wealth has been destroyed.

c.

Summary Introduction

To explain: Whether the suppliers were paid on time or not and if not the reasons for the late.

c.

Expert Solution

Answer to Problem 20IC

The suppliers were not paid on time and the reasons for this are as follows:

The accounts payable balance has raised by 260% from the last year.
The sales balance has raised by only 76%.
These records of the company demonstrates that the suppliers were not paid on time.

Explanation of Solution

The suppliers of any company are needed to be paid on time.
The increased accounts payable and not a high percentage of sales is not a good record for a company.
If suppliers do not pay on time, the relationship gets strained with them.
If it exists to be late in paying the suppliers, the suppliers will sue the company and make it as bankrupt.

Conclusion

Thus, the company fails to pay the suppliers on time and the reasons are as mentioned above.

d.

Summary Introduction

To explain: Whether the sales price increases the costs per unit sold and if that affects the cash balance.

d.

Expert Solution

Answer to Problem 20IC

From the income statements, the following conclusions are made:

It does not look like the sales price exceeds the costs per unit sold.
As the company is spending much cash than it is earning, the balance in the cash account has reduced.

Explanation of Solution

The income statement shows the costs at which each unit is sold and also the sales price.
Any effect on the cash balance and the costs can be known by the income statement.

Conclusion

Hence, the sales price increases the costs per unit sold and the cash account balance has reduced.

e.

Summary Introduction

To explain: The effect on the cash account and the effect on cash account if the credit policy is changed.

e.

Expert Solution

Answer to Problem 20IC

The effect on the cash account in the given situation is as follows:

By extending the credit terms of the sale, it will take more time to get the money.
The cash account will reduce and the accounts receivable will increase.
The inventory and the fixed assets, both can build up.
The accounts receivable would increase, then the cash will decline.
When the collections will increase, then the cash would rise.
In this situation, the company needs to borrow or sell the stock to provide fund for the expansion.

Explanation of Solution

If the credit policy changes for any company, it surely affects the cash balance.
If the credit terms are extended, the time for receiving the money also increases.
The accounts receivable balance rises when the credit term is extended and so the cash balance reduces.

Conclusion

Thus, the cash balance will decrease when the credit policy is changed.

f.

Summary Introduction

To explain: The imagination of a situation in which the price of sales increases the production cost and selling output.

f.

Expert Solution

Answer to Problem 20IC

The situation, where the sales price increases the costs of producing and selling a unit of output, the vast increase in sales volume leads the cash balance to decrease. This situation has the following effects:

The inventory would build up in this case and so the fixed assets will also increase much before the sales could be raised.
The accounts receivable will arise in this situation and the cash would decline.
When the collections will start, then the cash balance will increase.
To finance the expansion, the company needs to borrow or sell the stock.

Explanation of Solution

A situation in which the price of the sales is more than the costs of producing and selling the output and the vast increase in the sales volume leads the cash balance to reduce.
In this situation, it is dramatic that despite high selling price the sales volume has increased.
The company if has to do the expansion, has to sell or lend the stocks.

Conclusion

Hence,in the given situation the effects are as mentioned above.

g.

Summary Introduction

To explain: The way in which the expansion program is financed and the way it affects the financial strength of the company.

g.

Expert Solution

Answer to Problem 20IC

The company is financed with external capital instead of internally generated funds.
The company issued long-term debt rather than the common stock that reduces the financial strength and the flexibility of the company.

Explanation of Solution

When a company expands, it needs some financing; this financing is done with the external capital instead of internally generated funds.
When the company finances with the external capital, the company has to bear the interests also.
But when this financing is done with funds generated internally, the company has not to bear any interests.

Conclusion

Hence, the company is financed with the external capital and it reduces the financial strength of the company.

h.

Summary Introduction

To explain: The effect of the asset expansion and whether this requires a raise in the external capital.

h.

Expert Solution

Answer to Problem 20IC

The effects of the asset expansion are as follows:

The company has broken in 2018 this means that the sales revenue has equaled the total operating costs and the interest charges.
In this situation, the firm needs to finance an increase in the assets.

Explanation of Solution

The asset expansion means that the company is trying to acquire new assets, for this the company needs some way for the financing.
The expansion of the assets causes the company to experience the shortage of cash, which in turn requires it to raise the external capital.

Conclusion

Hence, in the given situation, the company would have to finance an increase in the assets.

i.

Summary Introduction

To explain: The effects on the (1) physical stock of assets, (2) the balance sheet account for fixed assets, (3) the company’s reported net income and (4) the cash position of the company.

i.

Expert Solution

Answer to Problem 20IC

If the fixed assets are depreciated over 7 years rather than 10 years the effects are as follows:

(1) The physical stock of assets- There will not be any effect on the physical stock of assets.
(2) The balance sheet accounts for fixed assets- The balance sheet account for the fixed assets would reduce because the accumulated depreciation will raise as the assets are depreciating for 7 years over 10 years.
(3) The company’s reported net income- As the depreciation expense will raise, the net income would decrease.
(4) The cash position of the company- The cash position of the firm will increase, as the tax payments would be reduced.

Explanation of Solution

If the depreciation year of the assets is reduced, this results in a reduction of the accumulated depreciation.
When there is less accumulated depreciation, the balance in the depreciation account would reduce.
This would also result in a declinein net income.
But, as it will reduce the tax payments, the cash position is improved.

Conclusion

Hence, (1) the physical stock of the assets would have no effect, (2) the balance sheet account would decline, (3) the reported net income would decrease and (4) the cash position will improve.

j.

Summary Introduction

To explain: The meaning and calculations of the earnings per share, dividends per share and the book value per share and the reason for the market price per share not equal to the book value per share.

j.

Expert Solution

Answer to Problem 20IC

The meaning and calculations of the given terms are as follows:

Earnings per share: The earnings per share refer to that part of the profit of the company which is divided into each of the outstanding shares of the stock of a company. It is computed by dividing the net income by the number of outstanding shares.
Dividends per share: The dividends per share refer to that sum of declared dividends that is issued by a company for each of the shares which is outstanding. This is the amount of dividend which is received by the shareholders for each number of shares. It is calculated by dividing the amount of dividend from the shares outstanding.
Book value per share: The book value per share refers to that part of common equity, which is given to each of the shareholders. It is computed by dividing the common equity by the outstanding number of shares.

The market price per share is not equivalent to the book value per share. The market value of a share reflects the profitability that can be earned by the share in the future while book value per share denotes the historic cost of the share.

Explanation of Solution

The dividends per share, earnings per share and the book value per share are the profitability ratios.
These ratios help to determine the capacity of a company and help the investor and the user understand the financial status of the company.
The market price per share is different than the book value per share as both reflect a different value.

Conclusion

Thus, the meaning and calculation of the given terms are as explained above and the market price for one share is not equal to book value per share.

k.

Summary Introduction

To explain: The tax treatment of (1) the payment of interest and dividends, (2) dividends received and interest earned, (3) capital gains and (4) tax loss carry-backs and carry-forwards and the effect of these items on the taxes.

k.

Expert Solution

Answer to Problem 20IC

The tax treatment for the given items is as follows:

(1) Interest and dividends paid: The payment of interest is considered as an expense and is paid out of pre-tax income. So, the payment of interest is tax deductible for a business. The payment of interest is generally not tax-deductible for the individuals, but the exception is limited to home mortgage. The payment of dividends by a business are paid out of after-tax income.
(2) Interest earned and dividends received: The interest received either by a individual or business is taxable income and is subject to taxes of standard income, except for the local and state government debt interest. The dividends gained are taxed at the rate of capital gains for the individuals. But this sometimes faces double taxation also. The portion of dividends, which is received by corporations is not included in the tax.
(3) Capital gains: The capital gains for individuals are taxed as ordinary income if it exceeds one year, and is taxed at the capital gains rate if it is held for more than one year. The capital gains for corporations are taxed as ordinary income.
(4) Tax-loss carry backs and carry forwards: The tax-loss carrybacks and carry forward provisions lets the businesses to utilize a loss in the present year to compensate the profits in the prior years and if losses have not been fully set by previous profits they can be carried forward to compensate the profits in future.

Explanation of Solution

The tax treatment is different for different kinds of heads.
The interest paid is not taxed to the individual.
The interest earned is taxable as per the subject to taxes.
The dividends are paid after the tax treatment.
The dividends received are capital gains and are subject to taxes.

Conclusion

Thus, the tax treatment for the given items is as mentioned above.

Want to see more full solutions like this?

Subscribe now to access step-by-step solutions to millions of textbook problems written by subject matter experts!

Students have asked these similar questions

FINANCIAL STATEMENTS AND TAXES Part I of this case, presented in Chapter 3, discussed the situation of D’Leon Inc., a regional snack foods producer, after an expansion program. D’Leon had increased plant capacity and undertaken a major marketing campaign in an attempt to “go national.” Thus far, sales have not been up to the forecasted level, costs have been higher than were projected, and a large loss occurred in 2018 rather than the expected profit. As a result, its managers, directors, and investors are concerned about the firm’s survival.Donna Jamison was brought in as assistant to Fred Campo, D’Leon’s chairman, who had the task of getting the company back into a sound financial position. D’Leon’s 2017 and 2018 balance sheets and income statements, together with projections for 2019, are given in Tables IC 4.1 and IC 4.2. In addition,Table IC 4.3 gives the company’s 2017 and 2018 financial ratios, together with industry average data.The 2019 projected financial statement data…

D'LEON INC., PART Il FINANCIAL STATEMENTS AND TAXES Part I of this case, presented in Chapter 3, discussed the situation of D'Leon Inc., a regional snack foods producer, after an expansion program. D'Leon had increased plant capacity and undertaken a major marketing campaign in an attempt to "go national." Thus far, sales have not been up to the forecasted level, costs have been higher than were projected, and a large loss occurred in 2018 rather than the expected profit. As a result, its managers, directors, and investors are concerned about the firm's survival Donna Jamison was brought in as assistant to Fred Campo, D'Leon's chairman, who had the task of getting the company back into a sound financial position. D'Leon's 2017 and 2018 balance sheets and income statements, together with projections for 2019, are given in Tables IC 4.1 and IC 4.2. In addition, Table IC 4.3 gives the company's 2017 and 2018 financial ratios, together with industry average data. The 2019 projected…

Suppose you are the only owner of a chain of coffee shops near universities. Your current cafés are doing well, but you are interested in starting a fine-dining restaurant. You decide to use the cash generated from your existing business to enter into a new business. Your accountant provides you with the following data on your current financial performance: Financial update as of June 15 • Your existing business generates $111,000 in EBIT. • The corporate tax rate applicable to your business is 25%. • The depreciation expense reported in the financial statements is $21,143. • You don’t need to spend any money for new equipment in your existing cafés; however, you do need $16,650 of additional cash. • You also need to purchase $8,880 in additional supplies—such as tableclothes and napkins, and more formal tableware—on credit. • It is also estimated that your accruals, including taxes and wages payable, will increase by $5,550. Based on your evaluation you have…

Answer 2

Question

Definition Definition Tax imposed by the government on the "gain" or increase in the value of an asset at the time of its sale by the owner. Capital gain is computed based on the purchase price and sale price of the asset. If the sale price of the asset is more than the purchase price, there is a gain on the sale of asset. A tax is imposed on such gain in accordance with the applicable tax rates at the time of sale.

Chapter 3, Problem 20IC

a.

Summary Introduction

To determine: The effect of expansion of the after-tax operating income, sales, net income and net operating working capital.

Operating Income:

The operating income refers to that income which is the net income of a business, excluding the financial effects and taxes.

Net Operating Working Capital:

It is a fiscal tool to measure the working liquidity of the business. It is calculated by subtracting the operating current assets which do not include interest from the operating liabilities which also not include interest.

Net Income:

It is the total earnings of the business which is derived from deducting all the interest and taxes from the income.

a.

Expert Solution

Explanation of Solution

Calculation of the effect on net income:

The formula to calculate the effect on net income is as follows:

(Effect on net income)=[(Net income of 2018)−(Net income of 2017)]

Substitute ($160,176) for net income of 2018 and $87,960 for net income of 2017 in the above formula.

(Effect on net income)=[(−$160,176)−$87,960]=−$248,136

The net income decreases by $248,136.

Calculation of after-tax operating income of 2018,

After-tax operating income=EBIT(1−Tax rate)=−$130,948(1−0.4)=−$78,569

The after-tax operating income of 2018 is ($78,569).

Calculation of after-tax operating income of 2017,

After-tax operating income=EBIT(1−Tax rate)=$190,248(1−0.4)=$114,149

The after-tax operating income for2017 is $114,149.

Calculation of net-operating working capital of 2018,

(Net-operatingworking capital)=[(Current assets−Excess cash)−(Current liabilities−Notes payable)]=($1,926,802−$7,282)−($1,650,568−$636,808)=$1,919,520−1,013,760=$905,760

The net operating working capital of 2018 is $905,760.

Calculation of net-operating working capital of 2017,

(Net-operatingworking capital)=[(Current assets−Excess cash)−(Current liabilities−Notes payable)]=($1,124,000−$57,600)−($481,600−$200,000)=$1,066,400−$281,600=$784,800

The net operating working capital of 2017 is $784,800.

Conclusion:

Hence, the net operating working capital increases by $120,960 and the net income decreases by $248,136.

b.

Summary Introduction

To determine: The effect of the expansion on the free cash flow.

Free Cash Flow:

It refers to that cash, which a company can produce after expansion. This is a degree of financial performance of a firm.

b.

Expert Solution

Explanation of Solution

Calculation of the effect on the free cash flow:

The formula to calculate the effect on free cash flow of 2016 is as follows:

Free cash flow=[After-tax operating income+Depreciation]−[Capital expenditures+(Difference in net-operatingworking capital)]

Substitute ($78,569) for after-tax operating income, $116,960 for depreciation, $711,950 for the capital expenditures and $70,642 for the difference in the net operating working capital in the above formula.

Free cash flow=[−$78,569+$116,960]−[$711,950+$120,960]=$38,391−$832910=−$794,519

The free cash flow in 2018 is ($794,519).

Conclusion

Hence, the expansion showsnegative cash flow of ($794,519) which means that the shareholder wealth has been destroyed.

c.

Summary Introduction

To explain: Whether the suppliers were paid on time or not and if not the reasons for the late.

c.

Expert Solution

Answer to Problem 20IC

The suppliers were not paid on time and the reasons for this are as follows:

The accounts payable balance has raised by 260% from the last year.
The sales balance has raised by only 76%.
These records of the company demonstrates that the suppliers were not paid on time.

Explanation of Solution

The suppliers of any company are needed to be paid on time.
The increased accounts payable and not a high percentage of sales is not a good record for a company.
If suppliers do not pay on time, the relationship gets strained with them.
If it exists to be late in paying the suppliers, the suppliers will sue the company and make it as bankrupt.

Conclusion

Thus, the company fails to pay the suppliers on time and the reasons are as mentioned above.

d.

Summary Introduction

To explain: Whether the sales price increases the costs per unit sold and if that affects the cash balance.

d.

Expert Solution

Answer to Problem 20IC

From the income statements, the following conclusions are made:

It does not look like the sales price exceeds the costs per unit sold.
As the company is spending much cash than it is earning, the balance in the cash account has reduced.

Explanation of Solution

The income statement shows the costs at which each unit is sold and also the sales price.
Any effect on the cash balance and the costs can be known by the income statement.

Conclusion

Hence, the sales price increases the costs per unit sold and the cash account balance has reduced.

e.

Summary Introduction

To explain: The effect on the cash account and the effect on cash account if the credit policy is changed.

e.

Expert Solution

Answer to Problem 20IC

The effect on the cash account in the given situation is as follows:

By extending the credit terms of the sale, it will take more time to get the money.
The cash account will reduce and the accounts receivable will increase.
The inventory and the fixed assets, both can build up.
The accounts receivable would increase, then the cash will decline.
When the collections will increase, then the cash would rise.
In this situation, the company needs to borrow or sell the stock to provide fund for the expansion.

Explanation of Solution

If the credit policy changes for any company, it surely affects the cash balance.
If the credit terms are extended, the time for receiving the money also increases.
The accounts receivable balance rises when the credit term is extended and so the cash balance reduces.

Conclusion

Thus, the cash balance will decrease when the credit policy is changed.

f.

Summary Introduction

To explain: The imagination of a situation in which the price of sales increases the production cost and selling output.

f.

Expert Solution

Answer to Problem 20IC

The situation, where the sales price increases the costs of producing and selling a unit of output, the vast increase in sales volume leads the cash balance to decrease. This situation has the following effects:

The inventory would build up in this case and so the fixed assets will also increase much before the sales could be raised.
The accounts receivable will arise in this situation and the cash would decline.
When the collections will start, then the cash balance will increase.
To finance the expansion, the company needs to borrow or sell the stock.

Explanation of Solution

A situation in which the price of the sales is more than the costs of producing and selling the output and the vast increase in the sales volume leads the cash balance to reduce.
In this situation, it is dramatic that despite high selling price the sales volume has increased.
The company if has to do the expansion, has to sell or lend the stocks.

Conclusion

Hence,in the given situation the effects are as mentioned above.

g.

Summary Introduction

To explain: The way in which the expansion program is financed and the way it affects the financial strength of the company.

g.

Expert Solution

Answer to Problem 20IC

The company is financed with external capital instead of internally generated funds.
The company issued long-term debt rather than the common stock that reduces the financial strength and the flexibility of the company.

Explanation of Solution

When a company expands, it needs some financing; this financing is done with the external capital instead of internally generated funds.
When the company finances with the external capital, the company has to bear the interests also.
But when this financing is done with funds generated internally, the company has not to bear any interests.

Conclusion

Hence, the company is financed with the external capital and it reduces the financial strength of the company.

h.

Summary Introduction

To explain: The effect of the asset expansion and whether this requires a raise in the external capital.

h.

Expert Solution

Answer to Problem 20IC

The effects of the asset expansion are as follows:

The company has broken in 2018 this means that the sales revenue has equaled the total operating costs and the interest charges.
In this situation, the firm needs to finance an increase in the assets.

Explanation of Solution

The asset expansion means that the company is trying to acquire new assets, for this the company needs some way for the financing.
The expansion of the assets causes the company to experience the shortage of cash, which in turn requires it to raise the external capital.

Conclusion

Hence, in the given situation, the company would have to finance an increase in the assets.

i.

Summary Introduction

To explain: The effects on the (1) physical stock of assets, (2) the balance sheet account for fixed assets, (3) the company’s reported net income and (4) the cash position of the company.

i.

Expert Solution

Answer to Problem 20IC

If the fixed assets are depreciated over 7 years rather than 10 years the effects are as follows:

(1) The physical stock of assets- There will not be any effect on the physical stock of assets.
(2) The balance sheet accounts for fixed assets- The balance sheet account for the fixed assets would reduce because the accumulated depreciation will raise as the assets are depreciating for 7 years over 10 years.
(3) The company’s reported net income- As the depreciation expense will raise, the net income would decrease.
(4) The cash position of the company- The cash position of the firm will increase, as the tax payments would be reduced.

Explanation of Solution

If the depreciation year of the assets is reduced, this results in a reduction of the accumulated depreciation.
When there is less accumulated depreciation, the balance in the depreciation account would reduce.
This would also result in a declinein net income.
But, as it will reduce the tax payments, the cash position is improved.

Conclusion

Hence, (1) the physical stock of the assets would have no effect, (2) the balance sheet account would decline, (3) the reported net income would decrease and (4) the cash position will improve.

j.

Summary Introduction

To explain: The meaning and calculations of the earnings per share, dividends per share and the book value per share and the reason for the market price per share not equal to the book value per share.

j.

Expert Solution

Answer to Problem 20IC

The meaning and calculations of the given terms are as follows:

Earnings per share: The earnings per share refer to that part of the profit of the company which is divided into each of the outstanding shares of the stock of a company. It is computed by dividing the net income by the number of outstanding shares.
Dividends per share: The dividends per share refer to that sum of declared dividends that is issued by a company for each of the shares which is outstanding. This is the amount of dividend which is received by the shareholders for each number of shares. It is calculated by dividing the amount of dividend from the shares outstanding.
Book value per share: The book value per share refers to that part of common equity, which is given to each of the shareholders. It is computed by dividing the common equity by the outstanding number of shares.

The market price per share is not equivalent to the book value per share. The market value of a share reflects the profitability that can be earned by the share in the future while book value per share denotes the historic cost of the share.

Explanation of Solution

The dividends per share, earnings per share and the book value per share are the profitability ratios.
These ratios help to determine the capacity of a company and help the investor and the user understand the financial status of the company.
The market price per share is different than the book value per share as both reflect a different value.

Conclusion

Thus, the meaning and calculation of the given terms are as explained above and the market price for one share is not equal to book value per share.

k.

Summary Introduction

To explain: The tax treatment of (1) the payment of interest and dividends, (2) dividends received and interest earned, (3) capital gains and (4) tax loss carry-backs and carry-forwards and the effect of these items on the taxes.

k.

Expert Solution

Answer to Problem 20IC

The tax treatment for the given items is as follows:

(1) Interest and dividends paid: The payment of interest is considered as an expense and is paid out of pre-tax income. So, the payment of interest is tax deductible for a business. The payment of interest is generally not tax-deductible for the individuals, but the exception is limited to home mortgage. The payment of dividends by a business are paid out of after-tax income.
(2) Interest earned and dividends received: The interest received either by a individual or business is taxable income and is subject to taxes of standard income, except for the local and state government debt interest. The dividends gained are taxed at the rate of capital gains for the individuals. But this sometimes faces double taxation also. The portion of dividends, which is received by corporations is not included in the tax.
(3) Capital gains: The capital gains for individuals are taxed as ordinary income if it exceeds one year, and is taxed at the capital gains rate if it is held for more than one year. The capital gains for corporations are taxed as ordinary income.
(4) Tax-loss carry backs and carry forwards: The tax-loss carrybacks and carry forward provisions lets the businesses to utilize a loss in the present year to compensate the profits in the prior years and if losses have not been fully set by previous profits they can be carried forward to compensate the profits in future.

Explanation of Solution

The tax treatment is different for different kinds of heads.
The interest paid is not taxed to the individual.
The interest earned is taxable as per the subject to taxes.
The dividends are paid after the tax treatment.
The dividends received are capital gains and are subject to taxes.

Conclusion

Thus, the tax treatment for the given items is as mentioned above.

Want to see more full solutions like this?

Subscribe now to access step-by-step solutions to millions of textbook problems written by subject matter experts!

Answer 3

Question

Definition Definition Tax imposed by the government on the "gain" or increase in the value of an asset at the time of its sale by the owner. Capital gain is computed based on the purchase price and sale price of the asset. If the sale price of the asset is more than the purchase price, there is a gain on the sale of asset. A tax is imposed on such gain in accordance with the applicable tax rates at the time of sale.

Chapter 3, Problem 20IC

a.

Summary Introduction

To determine: The effect of expansion of the after-tax operating income, sales, net income and net operating working capital.

Operating Income:

The operating income refers to that income which is the net income of a business, excluding the financial effects and taxes.

Net Operating Working Capital:

It is a fiscal tool to measure the working liquidity of the business. It is calculated by subtracting the operating current assets which do not include interest from the operating liabilities which also not include interest.

Net Income:

It is the total earnings of the business which is derived from deducting all the interest and taxes from the income.

a.

Expert Solution

Explanation of Solution

Calculation of the effect on net income:

The formula to calculate the effect on net income is as follows:

(Effect on net income)=[(Net income of 2018)−(Net income of 2017)]

Substitute ($160,176) for net income of 2018 and $87,960 for net income of 2017 in the above formula.

(Effect on net income)=[(−$160,176)−$87,960]=−$248,136

The net income decreases by $248,136.

Calculation of after-tax operating income of 2018,

After-tax operating income=EBIT(1−Tax rate)=−$130,948(1−0.4)=−$78,569

The after-tax operating income of 2018 is ($78,569).

Calculation of after-tax operating income of 2017,

After-tax operating income=EBIT(1−Tax rate)=$190,248(1−0.4)=$114,149

The after-tax operating income for2017 is $114,149.

Calculation of net-operating working capital of 2018,

(Net-operatingworking capital)=[(Current assets−Excess cash)−(Current liabilities−Notes payable)]=($1,926,802−$7,282)−($1,650,568−$636,808)=$1,919,520−1,013,760=$905,760

The net operating working capital of 2018 is $905,760.

Calculation of net-operating working capital of 2017,

(Net-operatingworking capital)=[(Current assets−Excess cash)−(Current liabilities−Notes payable)]=($1,124,000−$57,600)−($481,600−$200,000)=$1,066,400−$281,600=$784,800

The net operating working capital of 2017 is $784,800.

Conclusion:

Hence, the net operating working capital increases by $120,960 and the net income decreases by $248,136.

b.

Summary Introduction

To determine: The effect of the expansion on the free cash flow.

Free Cash Flow:

It refers to that cash, which a company can produce after expansion. This is a degree of financial performance of a firm.

b.

Expert Solution

Explanation of Solution

Calculation of the effect on the free cash flow:

The formula to calculate the effect on free cash flow of 2016 is as follows:

Free cash flow=[After-tax operating income+Depreciation]−[Capital expenditures+(Difference in net-operatingworking capital)]

Substitute ($78,569) for after-tax operating income, $116,960 for depreciation, $711,950 for the capital expenditures and $70,642 for the difference in the net operating working capital in the above formula.

Free cash flow=[−$78,569+$116,960]−[$711,950+$120,960]=$38,391−$832910=−$794,519

The free cash flow in 2018 is ($794,519).

Conclusion

Hence, the expansion showsnegative cash flow of ($794,519) which means that the shareholder wealth has been destroyed.

c.

Summary Introduction

To explain: Whether the suppliers were paid on time or not and if not the reasons for the late.

c.

Expert Solution

Answer to Problem 20IC

The suppliers were not paid on time and the reasons for this are as follows:

The accounts payable balance has raised by 260% from the last year.
The sales balance has raised by only 76%.
These records of the company demonstrates that the suppliers were not paid on time.

Explanation of Solution

The suppliers of any company are needed to be paid on time.
The increased accounts payable and not a high percentage of sales is not a good record for a company.
If suppliers do not pay on time, the relationship gets strained with them.
If it exists to be late in paying the suppliers, the suppliers will sue the company and make it as bankrupt.

Conclusion

Thus, the company fails to pay the suppliers on time and the reasons are as mentioned above.

d.

Summary Introduction

To explain: Whether the sales price increases the costs per unit sold and if that affects the cash balance.

d.

Expert Solution

Answer to Problem 20IC

From the income statements, the following conclusions are made:

It does not look like the sales price exceeds the costs per unit sold.
As the company is spending much cash than it is earning, the balance in the cash account has reduced.

Explanation of Solution

The income statement shows the costs at which each unit is sold and also the sales price.
Any effect on the cash balance and the costs can be known by the income statement.

Conclusion

Hence, the sales price increases the costs per unit sold and the cash account balance has reduced.

e.

Summary Introduction

To explain: The effect on the cash account and the effect on cash account if the credit policy is changed.

e.

Expert Solution

Answer to Problem 20IC

The effect on the cash account in the given situation is as follows:

By extending the credit terms of the sale, it will take more time to get the money.
The cash account will reduce and the accounts receivable will increase.
The inventory and the fixed assets, both can build up.
The accounts receivable would increase, then the cash will decline.
When the collections will increase, then the cash would rise.
In this situation, the company needs to borrow or sell the stock to provide fund for the expansion.

Explanation of Solution

If the credit policy changes for any company, it surely affects the cash balance.
If the credit terms are extended, the time for receiving the money also increases.
The accounts receivable balance rises when the credit term is extended and so the cash balance reduces.

Conclusion

Thus, the cash balance will decrease when the credit policy is changed.

f.

Summary Introduction

To explain: The imagination of a situation in which the price of sales increases the production cost and selling output.

f.

Expert Solution

Answer to Problem 20IC

The situation, where the sales price increases the costs of producing and selling a unit of output, the vast increase in sales volume leads the cash balance to decrease. This situation has the following effects:

The inventory would build up in this case and so the fixed assets will also increase much before the sales could be raised.
The accounts receivable will arise in this situation and the cash would decline.
When the collections will start, then the cash balance will increase.
To finance the expansion, the company needs to borrow or sell the stock.

Explanation of Solution

A situation in which the price of the sales is more than the costs of producing and selling the output and the vast increase in the sales volume leads the cash balance to reduce.
In this situation, it is dramatic that despite high selling price the sales volume has increased.
The company if has to do the expansion, has to sell or lend the stocks.

Conclusion

Hence,in the given situation the effects are as mentioned above.

g.

Summary Introduction

To explain: The way in which the expansion program is financed and the way it affects the financial strength of the company.

g.

Expert Solution

Answer to Problem 20IC

The company is financed with external capital instead of internally generated funds.
The company issued long-term debt rather than the common stock that reduces the financial strength and the flexibility of the company.

Explanation of Solution

When a company expands, it needs some financing; this financing is done with the external capital instead of internally generated funds.
When the company finances with the external capital, the company has to bear the interests also.
But when this financing is done with funds generated internally, the company has not to bear any interests.

Conclusion

Hence, the company is financed with the external capital and it reduces the financial strength of the company.

h.

Summary Introduction

To explain: The effect of the asset expansion and whether this requires a raise in the external capital.

h.

Expert Solution

Answer to Problem 20IC

The effects of the asset expansion are as follows:

The company has broken in 2018 this means that the sales revenue has equaled the total operating costs and the interest charges.
In this situation, the firm needs to finance an increase in the assets.

Explanation of Solution

The asset expansion means that the company is trying to acquire new assets, for this the company needs some way for the financing.
The expansion of the assets causes the company to experience the shortage of cash, which in turn requires it to raise the external capital.

Conclusion

Hence, in the given situation, the company would have to finance an increase in the assets.

i.

Summary Introduction

To explain: The effects on the (1) physical stock of assets, (2) the balance sheet account for fixed assets, (3) the company’s reported net income and (4) the cash position of the company.

i.

Expert Solution

Answer to Problem 20IC

If the fixed assets are depreciated over 7 years rather than 10 years the effects are as follows:

(1) The physical stock of assets- There will not be any effect on the physical stock of assets.
(2) The balance sheet accounts for fixed assets- The balance sheet account for the fixed assets would reduce because the accumulated depreciation will raise as the assets are depreciating for 7 years over 10 years.
(3) The company’s reported net income- As the depreciation expense will raise, the net income would decrease.
(4) The cash position of the company- The cash position of the firm will increase, as the tax payments would be reduced.

Explanation of Solution

If the depreciation year of the assets is reduced, this results in a reduction of the accumulated depreciation.
When there is less accumulated depreciation, the balance in the depreciation account would reduce.
This would also result in a declinein net income.
But, as it will reduce the tax payments, the cash position is improved.

Conclusion

Hence, (1) the physical stock of the assets would have no effect, (2) the balance sheet account would decline, (3) the reported net income would decrease and (4) the cash position will improve.

j.

Summary Introduction

To explain: The meaning and calculations of the earnings per share, dividends per share and the book value per share and the reason for the market price per share not equal to the book value per share.

j.

Expert Solution

Answer to Problem 20IC

The meaning and calculations of the given terms are as follows:

Earnings per share: The earnings per share refer to that part of the profit of the company which is divided into each of the outstanding shares of the stock of a company. It is computed by dividing the net income by the number of outstanding shares.
Dividends per share: The dividends per share refer to that sum of declared dividends that is issued by a company for each of the shares which is outstanding. This is the amount of dividend which is received by the shareholders for each number of shares. It is calculated by dividing the amount of dividend from the shares outstanding.
Book value per share: The book value per share refers to that part of common equity, which is given to each of the shareholders. It is computed by dividing the common equity by the outstanding number of shares.

The market price per share is not equivalent to the book value per share. The market value of a share reflects the profitability that can be earned by the share in the future while book value per share denotes the historic cost of the share.

Explanation of Solution

The dividends per share, earnings per share and the book value per share are the profitability ratios.
These ratios help to determine the capacity of a company and help the investor and the user understand the financial status of the company.
The market price per share is different than the book value per share as both reflect a different value.

Conclusion

Thus, the meaning and calculation of the given terms are as explained above and the market price for one share is not equal to book value per share.

k.

Summary Introduction

To explain: The tax treatment of (1) the payment of interest and dividends, (2) dividends received and interest earned, (3) capital gains and (4) tax loss carry-backs and carry-forwards and the effect of these items on the taxes.

k.

Expert Solution

Answer to Problem 20IC

The tax treatment for the given items is as follows:

(1) Interest and dividends paid: The payment of interest is considered as an expense and is paid out of pre-tax income. So, the payment of interest is tax deductible for a business. The payment of interest is generally not tax-deductible for the individuals, but the exception is limited to home mortgage. The payment of dividends by a business are paid out of after-tax income.
(2) Interest earned and dividends received: The interest received either by a individual or business is taxable income and is subject to taxes of standard income, except for the local and state government debt interest. The dividends gained are taxed at the rate of capital gains for the individuals. But this sometimes faces double taxation also. The portion of dividends, which is received by corporations is not included in the tax.
(3) Capital gains: The capital gains for individuals are taxed as ordinary income if it exceeds one year, and is taxed at the capital gains rate if it is held for more than one year. The capital gains for corporations are taxed as ordinary income.
(4) Tax-loss carry backs and carry forwards: The tax-loss carrybacks and carry forward provisions lets the businesses to utilize a loss in the present year to compensate the profits in the prior years and if losses have not been fully set by previous profits they can be carried forward to compensate the profits in future.

Explanation of Solution

The tax treatment is different for different kinds of heads.
The interest paid is not taxed to the individual.
The interest earned is taxable as per the subject to taxes.
The dividends are paid after the tax treatment.
The dividends received are capital gains and are subject to taxes.

Conclusion

Thus, the tax treatment for the given items is as mentioned above.

Want to see more full solutions like this?

Subscribe now to access step-by-step solutions to millions of textbook problems written by subject matter experts!

Answer 4

Question

Definition Definition Tax imposed by the government on the "gain" or increase in the value of an asset at the time of its sale by the owner. Capital gain is computed based on the purchase price and sale price of the asset. If the sale price of the asset is more than the purchase price, there is a gain on the sale of asset. A tax is imposed on such gain in accordance with the applicable tax rates at the time of sale.

Chapter 3, Problem 20IC

a.

Summary Introduction

To determine: The effect of expansion of the after-tax operating income, sales, net income and net operating working capital.

Operating Income:

The operating income refers to that income which is the net income of a business, excluding the financial effects and taxes.

Net Operating Working Capital:

It is a fiscal tool to measure the working liquidity of the business. It is calculated by subtracting the operating current assets which do not include interest from the operating liabilities which also not include interest.

Net Income:

It is the total earnings of the business which is derived from deducting all the interest and taxes from the income.

a.

Expert Solution

Explanation of Solution

Calculation of the effect on net income:

The formula to calculate the effect on net income is as follows:

(Effect on net income)=[(Net income of 2018)−(Net income of 2017)]

Substitute ($160,176) for net income of 2018 and $87,960 for net income of 2017 in the above formula.

(Effect on net income)=[(−$160,176)−$87,960]=−$248,136

The net income decreases by $248,136.

Calculation of after-tax operating income of 2018,

After-tax operating income=EBIT(1−Tax rate)=−$130,948(1−0.4)=−$78,569

The after-tax operating income of 2018 is ($78,569).

Calculation of after-tax operating income of 2017,

After-tax operating income=EBIT(1−Tax rate)=$190,248(1−0.4)=$114,149

The after-tax operating income for2017 is $114,149.

Calculation of net-operating working capital of 2018,

(Net-operatingworking capital)=[(Current assets−Excess cash)−(Current liabilities−Notes payable)]=($1,926,802−$7,282)−($1,650,568−$636,808)=$1,919,520−1,013,760=$905,760

The net operating working capital of 2018 is $905,760.

Calculation of net-operating working capital of 2017,

(Net-operatingworking capital)=[(Current assets−Excess cash)−(Current liabilities−Notes payable)]=($1,124,000−$57,600)−($481,600−$200,000)=$1,066,400−$281,600=$784,800

The net operating working capital of 2017 is $784,800.

Conclusion:

Hence, the net operating working capital increases by $120,960 and the net income decreases by $248,136.

b.

Summary Introduction

To determine: The effect of the expansion on the free cash flow.

Free Cash Flow:

It refers to that cash, which a company can produce after expansion. This is a degree of financial performance of a firm.

b.

Expert Solution

Explanation of Solution

Calculation of the effect on the free cash flow:

The formula to calculate the effect on free cash flow of 2016 is as follows:

Free cash flow=[After-tax operating income+Depreciation]−[Capital expenditures+(Difference in net-operatingworking capital)]

Substitute ($78,569) for after-tax operating income, $116,960 for depreciation, $711,950 for the capital expenditures and $70,642 for the difference in the net operating working capital in the above formula.

Free cash flow=[−$78,569+$116,960]−[$711,950+$120,960]=$38,391−$832910=−$794,519

The free cash flow in 2018 is ($794,519).

Conclusion

Hence, the expansion showsnegative cash flow of ($794,519) which means that the shareholder wealth has been destroyed.

c.

Summary Introduction

To explain: Whether the suppliers were paid on time or not and if not the reasons for the late.

c.

Expert Solution

Answer to Problem 20IC

The suppliers were not paid on time and the reasons for this are as follows:

The accounts payable balance has raised by 260% from the last year.
The sales balance has raised by only 76%.
These records of the company demonstrates that the suppliers were not paid on time.

Explanation of Solution

The suppliers of any company are needed to be paid on time.
The increased accounts payable and not a high percentage of sales is not a good record for a company.
If suppliers do not pay on time, the relationship gets strained with them.
If it exists to be late in paying the suppliers, the suppliers will sue the company and make it as bankrupt.

Conclusion

Thus, the company fails to pay the suppliers on time and the reasons are as mentioned above.

d.

Summary Introduction

To explain: Whether the sales price increases the costs per unit sold and if that affects the cash balance.

d.

Expert Solution

Answer to Problem 20IC

From the income statements, the following conclusions are made:

It does not look like the sales price exceeds the costs per unit sold.
As the company is spending much cash than it is earning, the balance in the cash account has reduced.

Explanation of Solution

The income statement shows the costs at which each unit is sold and also the sales price.
Any effect on the cash balance and the costs can be known by the income statement.

Conclusion

Hence, the sales price increases the costs per unit sold and the cash account balance has reduced.

e.

Summary Introduction

To explain: The effect on the cash account and the effect on cash account if the credit policy is changed.

e.

Expert Solution

Answer to Problem 20IC

The effect on the cash account in the given situation is as follows:

By extending the credit terms of the sale, it will take more time to get the money.
The cash account will reduce and the accounts receivable will increase.
The inventory and the fixed assets, both can build up.
The accounts receivable would increase, then the cash will decline.
When the collections will increase, then the cash would rise.
In this situation, the company needs to borrow or sell the stock to provide fund for the expansion.

Explanation of Solution

If the credit policy changes for any company, it surely affects the cash balance.
If the credit terms are extended, the time for receiving the money also increases.
The accounts receivable balance rises when the credit term is extended and so the cash balance reduces.

Conclusion

Thus, the cash balance will decrease when the credit policy is changed.

f.

Summary Introduction

To explain: The imagination of a situation in which the price of sales increases the production cost and selling output.

f.

Expert Solution

Answer to Problem 20IC

The situation, where the sales price increases the costs of producing and selling a unit of output, the vast increase in sales volume leads the cash balance to decrease. This situation has the following effects:

The inventory would build up in this case and so the fixed assets will also increase much before the sales could be raised.
The accounts receivable will arise in this situation and the cash would decline.
When the collections will start, then the cash balance will increase.
To finance the expansion, the company needs to borrow or sell the stock.

Explanation of Solution

A situation in which the price of the sales is more than the costs of producing and selling the output and the vast increase in the sales volume leads the cash balance to reduce.
In this situation, it is dramatic that despite high selling price the sales volume has increased.
The company if has to do the expansion, has to sell or lend the stocks.

Conclusion

Hence,in the given situation the effects are as mentioned above.

g.

Summary Introduction

To explain: The way in which the expansion program is financed and the way it affects the financial strength of the company.

g.

Expert Solution

Answer to Problem 20IC

The company is financed with external capital instead of internally generated funds.
The company issued long-term debt rather than the common stock that reduces the financial strength and the flexibility of the company.

Explanation of Solution

When a company expands, it needs some financing; this financing is done with the external capital instead of internally generated funds.
When the company finances with the external capital, the company has to bear the interests also.
But when this financing is done with funds generated internally, the company has not to bear any interests.

Conclusion

Hence, the company is financed with the external capital and it reduces the financial strength of the company.

h.

Summary Introduction

To explain: The effect of the asset expansion and whether this requires a raise in the external capital.

h.

Expert Solution

Answer to Problem 20IC

The effects of the asset expansion are as follows:

The company has broken in 2018 this means that the sales revenue has equaled the total operating costs and the interest charges.
In this situation, the firm needs to finance an increase in the assets.

Explanation of Solution

The asset expansion means that the company is trying to acquire new assets, for this the company needs some way for the financing.
The expansion of the assets causes the company to experience the shortage of cash, which in turn requires it to raise the external capital.

Conclusion

Hence, in the given situation, the company would have to finance an increase in the assets.

i.

Summary Introduction

To explain: The effects on the (1) physical stock of assets, (2) the balance sheet account for fixed assets, (3) the company’s reported net income and (4) the cash position of the company.

i.

Expert Solution

Answer to Problem 20IC

If the fixed assets are depreciated over 7 years rather than 10 years the effects are as follows:

(1) The physical stock of assets- There will not be any effect on the physical stock of assets.
(2) The balance sheet accounts for fixed assets- The balance sheet account for the fixed assets would reduce because the accumulated depreciation will raise as the assets are depreciating for 7 years over 10 years.
(3) The company’s reported net income- As the depreciation expense will raise, the net income would decrease.
(4) The cash position of the company- The cash position of the firm will increase, as the tax payments would be reduced.

Explanation of Solution

If the depreciation year of the assets is reduced, this results in a reduction of the accumulated depreciation.
When there is less accumulated depreciation, the balance in the depreciation account would reduce.
This would also result in a declinein net income.
But, as it will reduce the tax payments, the cash position is improved.

Conclusion

Hence, (1) the physical stock of the assets would have no effect, (2) the balance sheet account would decline, (3) the reported net income would decrease and (4) the cash position will improve.

j.

Summary Introduction

To explain: The meaning and calculations of the earnings per share, dividends per share and the book value per share and the reason for the market price per share not equal to the book value per share.

j.

Expert Solution

Answer to Problem 20IC

The meaning and calculations of the given terms are as follows:

Earnings per share: The earnings per share refer to that part of the profit of the company which is divided into each of the outstanding shares of the stock of a company. It is computed by dividing the net income by the number of outstanding shares.
Dividends per share: The dividends per share refer to that sum of declared dividends that is issued by a company for each of the shares which is outstanding. This is the amount of dividend which is received by the shareholders for each number of shares. It is calculated by dividing the amount of dividend from the shares outstanding.
Book value per share: The book value per share refers to that part of common equity, which is given to each of the shareholders. It is computed by dividing the common equity by the outstanding number of shares.

The market price per share is not equivalent to the book value per share. The market value of a share reflects the profitability that can be earned by the share in the future while book value per share denotes the historic cost of the share.

Explanation of Solution

The dividends per share, earnings per share and the book value per share are the profitability ratios.
These ratios help to determine the capacity of a company and help the investor and the user understand the financial status of the company.
The market price per share is different than the book value per share as both reflect a different value.

Conclusion

Thus, the meaning and calculation of the given terms are as explained above and the market price for one share is not equal to book value per share.

k.

Summary Introduction

To explain: The tax treatment of (1) the payment of interest and dividends, (2) dividends received and interest earned, (3) capital gains and (4) tax loss carry-backs and carry-forwards and the effect of these items on the taxes.

k.

Expert Solution

Answer to Problem 20IC

The tax treatment for the given items is as follows:

(1) Interest and dividends paid: The payment of interest is considered as an expense and is paid out of pre-tax income. So, the payment of interest is tax deductible for a business. The payment of interest is generally not tax-deductible for the individuals, but the exception is limited to home mortgage. The payment of dividends by a business are paid out of after-tax income.
(2) Interest earned and dividends received: The interest received either by a individual or business is taxable income and is subject to taxes of standard income, except for the local and state government debt interest. The dividends gained are taxed at the rate of capital gains for the individuals. But this sometimes faces double taxation also. The portion of dividends, which is received by corporations is not included in the tax.
(3) Capital gains: The capital gains for individuals are taxed as ordinary income if it exceeds one year, and is taxed at the capital gains rate if it is held for more than one year. The capital gains for corporations are taxed as ordinary income.
(4) Tax-loss carry backs and carry forwards: The tax-loss carrybacks and carry forward provisions lets the businesses to utilize a loss in the present year to compensate the profits in the prior years and if losses have not been fully set by previous profits they can be carried forward to compensate the profits in future.

Explanation of Solution

The tax treatment is different for different kinds of heads.
The interest paid is not taxed to the individual.
The interest earned is taxable as per the subject to taxes.
The dividends are paid after the tax treatment.
The dividends received are capital gains and are subject to taxes.

Conclusion

Thus, the tax treatment for the given items is as mentioned above.

Want to see more full solutions like this?

Subscribe now to access step-by-step solutions to millions of textbook problems written by subject matter experts!

Answer 5

Chapter 3, Problem 20IC

a.

Summary Introduction

To determine: The effect of expansion of the after-tax operating income, sales, net income and net operating working capital.

Operating Income:

The operating income refers to that income which is the net income of a business, excluding the financial effects and taxes.

Net Operating Working Capital:

It is a fiscal tool to measure the working liquidity of the business. It is calculated by subtracting the operating current assets which do not include interest from the operating liabilities which also not include interest.

Net Income:

It is the total earnings of the business which is derived from deducting all the interest and taxes from the income.

a.

Expert Solution

Explanation of Solution

Calculation of the effect on net income:

The formula to calculate the effect on net income is as follows:

(Effect on net income)=[(Net income of 2018)−(Net income of 2017)]

Substitute ($160,176) for net income of 2018 and $87,960 for net income of 2017 in the above formula.

(Effect on net income)=[(−$160,176)−$87,960]=−$248,136

The net income decreases by $248,136.

Calculation of after-tax operating income of 2018,

After-tax operating income=EBIT(1−Tax rate)=−$130,948(1−0.4)=−$78,569

The after-tax operating income of 2018 is ($78,569).

Calculation of after-tax operating income of 2017,

After-tax operating income=EBIT(1−Tax rate)=$190,248(1−0.4)=$114,149

The after-tax operating income for2017 is $114,149.

Calculation of net-operating working capital of 2018,

(Net-operatingworking capital)=[(Current assets−Excess cash)−(Current liabilities−Notes payable)]=($1,926,802−$7,282)−($1,650,568−$636,808)=$1,919,520−1,013,760=$905,760

The net operating working capital of 2018 is $905,760.

Calculation of net-operating working capital of 2017,

(Net-operatingworking capital)=[(Current assets−Excess cash)−(Current liabilities−Notes payable)]=($1,124,000−$57,600)−($481,600−$200,000)=$1,066,400−$281,600=$784,800

The net operating working capital of 2017 is $784,800.

Conclusion:

Hence, the net operating working capital increases by $120,960 and the net income decreases by $248,136.

b.

Summary Introduction

To determine: The effect of the expansion on the free cash flow.

Free Cash Flow:

It refers to that cash, which a company can produce after expansion. This is a degree of financial performance of a firm.

b.

Expert Solution

Explanation of Solution

Calculation of the effect on the free cash flow:

The formula to calculate the effect on free cash flow of 2016 is as follows:

Free cash flow=[After-tax operating income+Depreciation]−[Capital expenditures+(Difference in net-operatingworking capital)]

Substitute ($78,569) for after-tax operating income, $116,960 for depreciation, $711,950 for the capital expenditures and $70,642 for the difference in the net operating working capital in the above formula.

Free cash flow=[−$78,569+$116,960]−[$711,950+$120,960]=$38,391−$832910=−$794,519

The free cash flow in 2018 is ($794,519).

Conclusion

Hence, the expansion showsnegative cash flow of ($794,519) which means that the shareholder wealth has been destroyed.

c.

Summary Introduction

To explain: Whether the suppliers were paid on time or not and if not the reasons for the late.

c.

Expert Solution

Answer to Problem 20IC

The suppliers were not paid on time and the reasons for this are as follows:

The accounts payable balance has raised by 260% from the last year.
The sales balance has raised by only 76%.
These records of the company demonstrates that the suppliers were not paid on time.

Explanation of Solution

The suppliers of any company are needed to be paid on time.
The increased accounts payable and not a high percentage of sales is not a good record for a company.
If suppliers do not pay on time, the relationship gets strained with them.
If it exists to be late in paying the suppliers, the suppliers will sue the company and make it as bankrupt.

Conclusion

Thus, the company fails to pay the suppliers on time and the reasons are as mentioned above.

d.

Summary Introduction

To explain: Whether the sales price increases the costs per unit sold and if that affects the cash balance.

d.

Expert Solution

Answer to Problem 20IC

From the income statements, the following conclusions are made:

It does not look like the sales price exceeds the costs per unit sold.
As the company is spending much cash than it is earning, the balance in the cash account has reduced.

Explanation of Solution

The income statement shows the costs at which each unit is sold and also the sales price.
Any effect on the cash balance and the costs can be known by the income statement.

Conclusion

Hence, the sales price increases the costs per unit sold and the cash account balance has reduced.

e.

Summary Introduction

To explain: The effect on the cash account and the effect on cash account if the credit policy is changed.

e.

Expert Solution

Answer to Problem 20IC

The effect on the cash account in the given situation is as follows:

By extending the credit terms of the sale, it will take more time to get the money.
The cash account will reduce and the accounts receivable will increase.
The inventory and the fixed assets, both can build up.
The accounts receivable would increase, then the cash will decline.
When the collections will increase, then the cash would rise.
In this situation, the company needs to borrow or sell the stock to provide fund for the expansion.

Explanation of Solution

If the credit policy changes for any company, it surely affects the cash balance.
If the credit terms are extended, the time for receiving the money also increases.
The accounts receivable balance rises when the credit term is extended and so the cash balance reduces.

Conclusion

Thus, the cash balance will decrease when the credit policy is changed.

f.

Summary Introduction

To explain: The imagination of a situation in which the price of sales increases the production cost and selling output.

f.

Expert Solution

Answer to Problem 20IC

The situation, where the sales price increases the costs of producing and selling a unit of output, the vast increase in sales volume leads the cash balance to decrease. This situation has the following effects:

The inventory would build up in this case and so the fixed assets will also increase much before the sales could be raised.
The accounts receivable will arise in this situation and the cash would decline.
When the collections will start, then the cash balance will increase.
To finance the expansion, the company needs to borrow or sell the stock.

Explanation of Solution

A situation in which the price of the sales is more than the costs of producing and selling the output and the vast increase in the sales volume leads the cash balance to reduce.
In this situation, it is dramatic that despite high selling price the sales volume has increased.
The company if has to do the expansion, has to sell or lend the stocks.

Conclusion

Hence,in the given situation the effects are as mentioned above.

g.

Summary Introduction

To explain: The way in which the expansion program is financed and the way it affects the financial strength of the company.

g.

Expert Solution

Answer to Problem 20IC

The company is financed with external capital instead of internally generated funds.
The company issued long-term debt rather than the common stock that reduces the financial strength and the flexibility of the company.

Explanation of Solution

When a company expands, it needs some financing; this financing is done with the external capital instead of internally generated funds.
When the company finances with the external capital, the company has to bear the interests also.
But when this financing is done with funds generated internally, the company has not to bear any interests.

Conclusion

Hence, the company is financed with the external capital and it reduces the financial strength of the company.

h.

Summary Introduction

To explain: The effect of the asset expansion and whether this requires a raise in the external capital.

h.

Expert Solution

Answer to Problem 20IC

The effects of the asset expansion are as follows:

The company has broken in 2018 this means that the sales revenue has equaled the total operating costs and the interest charges.
In this situation, the firm needs to finance an increase in the assets.

Explanation of Solution

The asset expansion means that the company is trying to acquire new assets, for this the company needs some way for the financing.
The expansion of the assets causes the company to experience the shortage of cash, which in turn requires it to raise the external capital.

Conclusion

Hence, in the given situation, the company would have to finance an increase in the assets.

i.

Summary Introduction

To explain: The effects on the (1) physical stock of assets, (2) the balance sheet account for fixed assets, (3) the company’s reported net income and (4) the cash position of the company.

i.

Expert Solution

Answer to Problem 20IC

If the fixed assets are depreciated over 7 years rather than 10 years the effects are as follows:

(1) The physical stock of assets- There will not be any effect on the physical stock of assets.
(2) The balance sheet accounts for fixed assets- The balance sheet account for the fixed assets would reduce because the accumulated depreciation will raise as the assets are depreciating for 7 years over 10 years.
(3) The company’s reported net income- As the depreciation expense will raise, the net income would decrease.
(4) The cash position of the company- The cash position of the firm will increase, as the tax payments would be reduced.

Explanation of Solution

If the depreciation year of the assets is reduced, this results in a reduction of the accumulated depreciation.
When there is less accumulated depreciation, the balance in the depreciation account would reduce.
This would also result in a declinein net income.
But, as it will reduce the tax payments, the cash position is improved.

Conclusion

Hence, (1) the physical stock of the assets would have no effect, (2) the balance sheet account would decline, (3) the reported net income would decrease and (4) the cash position will improve.

j.

Summary Introduction

To explain: The meaning and calculations of the earnings per share, dividends per share and the book value per share and the reason for the market price per share not equal to the book value per share.

j.

Expert Solution

Answer to Problem 20IC

The meaning and calculations of the given terms are as follows:

Earnings per share: The earnings per share refer to that part of the profit of the company which is divided into each of the outstanding shares of the stock of a company. It is computed by dividing the net income by the number of outstanding shares.
Dividends per share: The dividends per share refer to that sum of declared dividends that is issued by a company for each of the shares which is outstanding. This is the amount of dividend which is received by the shareholders for each number of shares. It is calculated by dividing the amount of dividend from the shares outstanding.
Book value per share: The book value per share refers to that part of common equity, which is given to each of the shareholders. It is computed by dividing the common equity by the outstanding number of shares.

The market price per share is not equivalent to the book value per share. The market value of a share reflects the profitability that can be earned by the share in the future while book value per share denotes the historic cost of the share.

Explanation of Solution

The dividends per share, earnings per share and the book value per share are the profitability ratios.
These ratios help to determine the capacity of a company and help the investor and the user understand the financial status of the company.
The market price per share is different than the book value per share as both reflect a different value.

Conclusion

Thus, the meaning and calculation of the given terms are as explained above and the market price for one share is not equal to book value per share.

k.

Summary Introduction

To explain: The tax treatment of (1) the payment of interest and dividends, (2) dividends received and interest earned, (3) capital gains and (4) tax loss carry-backs and carry-forwards and the effect of these items on the taxes.

k.

Expert Solution

Answer to Problem 20IC

The tax treatment for the given items is as follows:

(1) Interest and dividends paid: The payment of interest is considered as an expense and is paid out of pre-tax income. So, the payment of interest is tax deductible for a business. The payment of interest is generally not tax-deductible for the individuals, but the exception is limited to home mortgage. The payment of dividends by a business are paid out of after-tax income.
(2) Interest earned and dividends received: The interest received either by a individual or business is taxable income and is subject to taxes of standard income, except for the local and state government debt interest. The dividends gained are taxed at the rate of capital gains for the individuals. But this sometimes faces double taxation also. The portion of dividends, which is received by corporations is not included in the tax.
(3) Capital gains: The capital gains for individuals are taxed as ordinary income if it exceeds one year, and is taxed at the capital gains rate if it is held for more than one year. The capital gains for corporations are taxed as ordinary income.
(4) Tax-loss carry backs and carry forwards: The tax-loss carrybacks and carry forward provisions lets the businesses to utilize a loss in the present year to compensate the profits in the prior years and if losses have not been fully set by previous profits they can be carried forward to compensate the profits in future.

Explanation of Solution

The tax treatment is different for different kinds of heads.
The interest paid is not taxed to the individual.
The interest earned is taxable as per the subject to taxes.
The dividends are paid after the tax treatment.
The dividends received are capital gains and are subject to taxes.

Conclusion

Thus, the tax treatment for the given items is as mentioned above.

Answer 6

Chapter 3, Problem 20IC

a.

Summary Introduction

To determine: The effect of expansion of the after-tax operating income, sales, net income and net operating working capital.

Operating Income:

The operating income refers to that income which is the net income of a business, excluding the financial effects and taxes.

Net Operating Working Capital:

It is a fiscal tool to measure the working liquidity of the business. It is calculated by subtracting the operating current assets which do not include interest from the operating liabilities which also not include interest.

Net Income:

It is the total earnings of the business which is derived from deducting all the interest and taxes from the income.

a.

Expert Solution

Explanation of Solution

Calculation of the effect on net income:

The formula to calculate the effect on net income is as follows:

(Effect on net income)=[(Net income of 2018)−(Net income of 2017)]

Substitute ($160,176) for net income of 2018 and $87,960 for net income of 2017 in the above formula.

(Effect on net income)=[(−$160,176)−$87,960]=−$248,136

The net income decreases by $248,136.

Calculation of after-tax operating income of 2018,

After-tax operating income=EBIT(1−Tax rate)=−$130,948(1−0.4)=−$78,569

The after-tax operating income of 2018 is ($78,569).

Calculation of after-tax operating income of 2017,

After-tax operating income=EBIT(1−Tax rate)=$190,248(1−0.4)=$114,149

The after-tax operating income for2017 is $114,149.

Calculation of net-operating working capital of 2018,

(Net-operatingworking capital)=[(Current assets−Excess cash)−(Current liabilities−Notes payable)]=($1,926,802−$7,282)−($1,650,568−$636,808)=$1,919,520−1,013,760=$905,760

The net operating working capital of 2018 is $905,760.

Calculation of net-operating working capital of 2017,

(Net-operatingworking capital)=[(Current assets−Excess cash)−(Current liabilities−Notes payable)]=($1,124,000−$57,600)−($481,600−$200,000)=$1,066,400−$281,600=$784,800

The net operating working capital of 2017 is $784,800.

Conclusion:

Hence, the net operating working capital increases by $120,960 and the net income decreases by $248,136.

Answer 7

Chapter 3, Problem 20IC

a.

Summary Introduction

To determine: The effect of expansion of the after-tax operating income, sales, net income and net operating working capital.

Operating Income:

The operating income refers to that income which is the net income of a business, excluding the financial effects and taxes.

Net Operating Working Capital:

It is a fiscal tool to measure the working liquidity of the business. It is calculated by subtracting the operating current assets which do not include interest from the operating liabilities which also not include interest.

Net Income:

It is the total earnings of the business which is derived from deducting all the interest and taxes from the income.

Answer 8

a.

Expert Solution

Explanation of Solution

Calculation of the effect on net income:

The formula to calculate the effect on net income is as follows:

(Effect on net income)=[(Net income of 2018)−(Net income of 2017)]

Substitute ($160,176) for net income of 2018 and $87,960 for net income of 2017 in the above formula.

(Effect on net income)=[(−$160,176)−$87,960]=−$248,136

The net income decreases by $248,136.

Calculation of after-tax operating income of 2018,

After-tax operating income=EBIT(1−Tax rate)=−$130,948(1−0.4)=−$78,569

The after-tax operating income of 2018 is ($78,569).

Calculation of after-tax operating income of 2017,

After-tax operating income=EBIT(1−Tax rate)=$190,248(1−0.4)=$114,149

The after-tax operating income for2017 is $114,149.

Calculation of net-operating working capital of 2018,

(Net-operatingworking capital)=[(Current assets−Excess cash)−(Current liabilities−Notes payable)]=($1,926,802−$7,282)−($1,650,568−$636,808)=$1,919,520−1,013,760=$905,760

The net operating working capital of 2018 is $905,760.

Calculation of net-operating working capital of 2017,

(Net-operatingworking capital)=[(Current assets−Excess cash)−(Current liabilities−Notes payable)]=($1,124,000−$57,600)−($481,600−$200,000)=$1,066,400−$281,600=$784,800

The net operating working capital of 2017 is $784,800.

Conclusion:

Hence, the net operating working capital increases by $120,960 and the net income decreases by $248,136.

Answer 9

a.

Expert Solution

Answer 10

a.

Expert Solution

Answer 11

Expert Solution

Answer 12

b.

Summary Introduction

To determine: The effect of the expansion on the free cash flow.

Free Cash Flow:

It refers to that cash, which a company can produce after expansion. This is a degree of financial performance of a firm.

b.

Expert Solution

Explanation of Solution

Calculation of the effect on the free cash flow:

The formula to calculate the effect on free cash flow of 2016 is as follows:

Free cash flow=[After-tax operating income+Depreciation]−[Capital expenditures+(Difference in net-operatingworking capital)]

Substitute ($78,569) for after-tax operating income, $116,960 for depreciation, $711,950 for the capital expenditures and $70,642 for the difference in the net operating working capital in the above formula.

Free cash flow=[−$78,569+$116,960]−[$711,950+$120,960]=$38,391−$832910=−$794,519

The free cash flow in 2018 is ($794,519).

Conclusion

Hence, the expansion showsnegative cash flow of ($794,519) which means that the shareholder wealth has been destroyed.

Answer 13

b.

Summary Introduction

To determine: The effect of the expansion on the free cash flow.

Free Cash Flow:

It refers to that cash, which a company can produce after expansion. This is a degree of financial performance of a firm.

Answer 14

b.

Expert Solution

Explanation of Solution

Calculation of the effect on the free cash flow:

The formula to calculate the effect on free cash flow of 2016 is as follows:

Free cash flow=[After-tax operating income+Depreciation]−[Capital expenditures+(Difference in net-operatingworking capital)]

Substitute ($78,569) for after-tax operating income, $116,960 for depreciation, $711,950 for the capital expenditures and $70,642 for the difference in the net operating working capital in the above formula.

Free cash flow=[−$78,569+$116,960]−[$711,950+$120,960]=$38,391−$832910=−$794,519

The free cash flow in 2018 is ($794,519).

Answer 15

b.

Expert Solution

Answer 16

b.

Expert Solution

Answer 17

Expert Solution

Answer 18

Conclusion

Hence, the expansion showsnegative cash flow of ($794,519) which means that the shareholder wealth has been destroyed.

Answer 19

c.

Summary Introduction

To explain: Whether the suppliers were paid on time or not and if not the reasons for the late.

c.

Expert Solution

Answer to Problem 20IC

The suppliers were not paid on time and the reasons for this are as follows:

The accounts payable balance has raised by 260% from the last year.
The sales balance has raised by only 76%.
These records of the company demonstrates that the suppliers were not paid on time.

Explanation of Solution

The suppliers of any company are needed to be paid on time.
The increased accounts payable and not a high percentage of sales is not a good record for a company.
If suppliers do not pay on time, the relationship gets strained with them.
If it exists to be late in paying the suppliers, the suppliers will sue the company and make it as bankrupt.

Conclusion

Thus, the company fails to pay the suppliers on time and the reasons are as mentioned above.

Answer 20

c.

Summary Introduction

To explain: Whether the suppliers were paid on time or not and if not the reasons for the late.

Answer 21

c.

Expert Solution

Answer to Problem 20IC

The suppliers were not paid on time and the reasons for this are as follows:

The accounts payable balance has raised by 260% from the last year.
The sales balance has raised by only 76%.
These records of the company demonstrates that the suppliers were not paid on time.

Answer 22

c.

Expert Solution

Answer 23

c.

Expert Solution

Answer 24

Expert Solution

Answer 25

Explanation of Solution

The suppliers of any company are needed to be paid on time.
The increased accounts payable and not a high percentage of sales is not a good record for a company.
If suppliers do not pay on time, the relationship gets strained with them.
If it exists to be late in paying the suppliers, the suppliers will sue the company and make it as bankrupt.

Answer 26

Conclusion

Thus, the company fails to pay the suppliers on time and the reasons are as mentioned above.

Answer 27

d.

Summary Introduction

To explain: Whether the sales price increases the costs per unit sold and if that affects the cash balance.

d.

Expert Solution

Answer to Problem 20IC

From the income statements, the following conclusions are made:

It does not look like the sales price exceeds the costs per unit sold.
As the company is spending much cash than it is earning, the balance in the cash account has reduced.

Explanation of Solution

The income statement shows the costs at which each unit is sold and also the sales price.
Any effect on the cash balance and the costs can be known by the income statement.

Conclusion

Hence, the sales price increases the costs per unit sold and the cash account balance has reduced.

Answer 28

d.

Summary Introduction

To explain: Whether the sales price increases the costs per unit sold and if that affects the cash balance.

Answer 29

d.

Expert Solution

Answer to Problem 20IC

From the income statements, the following conclusions are made:

It does not look like the sales price exceeds the costs per unit sold.
As the company is spending much cash than it is earning, the balance in the cash account has reduced.

Answer 30

d.

Expert Solution

Answer 31

d.

Expert Solution

Answer 32

Expert Solution

Answer 33

Explanation of Solution

The income statement shows the costs at which each unit is sold and also the sales price.
Any effect on the cash balance and the costs can be known by the income statement.

Answer 34

Conclusion

Hence, the sales price increases the costs per unit sold and the cash account balance has reduced.

Answer 35

e.

Summary Introduction

To explain: The effect on the cash account and the effect on cash account if the credit policy is changed.

e.

Expert Solution

Answer to Problem 20IC

The effect on the cash account in the given situation is as follows:

By extending the credit terms of the sale, it will take more time to get the money.
The cash account will reduce and the accounts receivable will increase.
The inventory and the fixed assets, both can build up.
The accounts receivable would increase, then the cash will decline.
When the collections will increase, then the cash would rise.
In this situation, the company needs to borrow or sell the stock to provide fund for the expansion.

Explanation of Solution

If the credit policy changes for any company, it surely affects the cash balance.
If the credit terms are extended, the time for receiving the money also increases.
The accounts receivable balance rises when the credit term is extended and so the cash balance reduces.

Conclusion

Thus, the cash balance will decrease when the credit policy is changed.

Answer 36

e.

Summary Introduction

To explain: The effect on the cash account and the effect on cash account if the credit policy is changed.

Answer 37

e.

Expert Solution

Answer to Problem 20IC

The effect on the cash account in the given situation is as follows:

By extending the credit terms of the sale, it will take more time to get the money.
The cash account will reduce and the accounts receivable will increase.
The inventory and the fixed assets, both can build up.
The accounts receivable would increase, then the cash will decline.
When the collections will increase, then the cash would rise.
In this situation, the company needs to borrow or sell the stock to provide fund for the expansion.

Answer 38

e.

Expert Solution

Answer 39

e.

Expert Solution

Answer 40

Expert Solution

Answer 41

Explanation of Solution

If the credit policy changes for any company, it surely affects the cash balance.
If the credit terms are extended, the time for receiving the money also increases.
The accounts receivable balance rises when the credit term is extended and so the cash balance reduces.

Answer 42

Conclusion

Thus, the cash balance will decrease when the credit policy is changed.

Answer 43

f.

Summary Introduction

To explain: The imagination of a situation in which the price of sales increases the production cost and selling output.

f.

Expert Solution

Answer to Problem 20IC

The situation, where the sales price increases the costs of producing and selling a unit of output, the vast increase in sales volume leads the cash balance to decrease. This situation has the following effects:

The inventory would build up in this case and so the fixed assets will also increase much before the sales could be raised.
The accounts receivable will arise in this situation and the cash would decline.
When the collections will start, then the cash balance will increase.
To finance the expansion, the company needs to borrow or sell the stock.

Explanation of Solution

A situation in which the price of the sales is more than the costs of producing and selling the output and the vast increase in the sales volume leads the cash balance to reduce.
In this situation, it is dramatic that despite high selling price the sales volume has increased.
The company if has to do the expansion, has to sell or lend the stocks.

Conclusion

Hence,in the given situation the effects are as mentioned above.

Answer 44

f.

Summary Introduction

To explain: The imagination of a situation in which the price of sales increases the production cost and selling output.

Answer 45

f.

Expert Solution

Answer to Problem 20IC

The situation, where the sales price increases the costs of producing and selling a unit of output, the vast increase in sales volume leads the cash balance to decrease. This situation has the following effects:

The inventory would build up in this case and so the fixed assets will also increase much before the sales could be raised.
The accounts receivable will arise in this situation and the cash would decline.
When the collections will start, then the cash balance will increase.
To finance the expansion, the company needs to borrow or sell the stock.

Answer 46

f.

Expert Solution

Answer 47

f.

Expert Solution

Answer 48

Expert Solution

Answer 49

Explanation of Solution

A situation in which the price of the sales is more than the costs of producing and selling the output and the vast increase in the sales volume leads the cash balance to reduce.
In this situation, it is dramatic that despite high selling price the sales volume has increased.
The company if has to do the expansion, has to sell or lend the stocks.

Answer 50

Conclusion

Hence,in the given situation the effects are as mentioned above.

Answer 51

g.

Summary Introduction

To explain: The way in which the expansion program is financed and the way it affects the financial strength of the company.

g.

Expert Solution

Answer to Problem 20IC

The company is financed with external capital instead of internally generated funds.
The company issued long-term debt rather than the common stock that reduces the financial strength and the flexibility of the company.

Explanation of Solution

When a company expands, it needs some financing; this financing is done with the external capital instead of internally generated funds.
When the company finances with the external capital, the company has to bear the interests also.
But when this financing is done with funds generated internally, the company has not to bear any interests.

Conclusion

Hence, the company is financed with the external capital and it reduces the financial strength of the company.

Answer 52

g.

Summary Introduction

To explain: The way in which the expansion program is financed and the way it affects the financial strength of the company.

Answer 53

g.

Expert Solution

Answer to Problem 20IC

The company is financed with external capital instead of internally generated funds.
The company issued long-term debt rather than the common stock that reduces the financial strength and the flexibility of the company.

Answer 54

g.

Expert Solution

Answer 55

g.

Expert Solution

Answer 56

Expert Solution

Answer 57

Explanation of Solution

When a company expands, it needs some financing; this financing is done with the external capital instead of internally generated funds.
When the company finances with the external capital, the company has to bear the interests also.
But when this financing is done with funds generated internally, the company has not to bear any interests.

Answer 58

Conclusion

Hence, the company is financed with the external capital and it reduces the financial strength of the company.

Answer 59

h.

Summary Introduction

To explain: The effect of the asset expansion and whether this requires a raise in the external capital.

h.

Expert Solution

Answer to Problem 20IC

The effects of the asset expansion are as follows:

The company has broken in 2018 this means that the sales revenue has equaled the total operating costs and the interest charges.
In this situation, the firm needs to finance an increase in the assets.

Explanation of Solution

The asset expansion means that the company is trying to acquire new assets, for this the company needs some way for the financing.
The expansion of the assets causes the company to experience the shortage of cash, which in turn requires it to raise the external capital.

Conclusion

Hence, in the given situation, the company would have to finance an increase in the assets.

Answer 60

h.

Summary Introduction

To explain: The effect of the asset expansion and whether this requires a raise in the external capital.

Answer 61

h.

Expert Solution

Answer to Problem 20IC

The effects of the asset expansion are as follows:

The company has broken in 2018 this means that the sales revenue has equaled the total operating costs and the interest charges.
In this situation, the firm needs to finance an increase in the assets.

Answer 62

h.

Expert Solution

Answer 63

h.

Expert Solution

Answer 64

Expert Solution

Answer 65

Explanation of Solution

The asset expansion means that the company is trying to acquire new assets, for this the company needs some way for the financing.
The expansion of the assets causes the company to experience the shortage of cash, which in turn requires it to raise the external capital.

Answer 66

Conclusion

Hence, in the given situation, the company would have to finance an increase in the assets.

Answer 67

i.

Summary Introduction

To explain: The effects on the (1) physical stock of assets, (2) the balance sheet account for fixed assets, (3) the company’s reported net income and (4) the cash position of the company.

i.

Expert Solution

Answer to Problem 20IC

If the fixed assets are depreciated over 7 years rather than 10 years the effects are as follows:

(1) The physical stock of assets- There will not be any effect on the physical stock of assets.
(2) The balance sheet accounts for fixed assets- The balance sheet account for the fixed assets would reduce because the accumulated depreciation will raise as the assets are depreciating for 7 years over 10 years.
(3) The company’s reported net income- As the depreciation expense will raise, the net income would decrease.
(4) The cash position of the company- The cash position of the firm will increase, as the tax payments would be reduced.

Explanation of Solution

If the depreciation year of the assets is reduced, this results in a reduction of the accumulated depreciation.
When there is less accumulated depreciation, the balance in the depreciation account would reduce.
This would also result in a declinein net income.
But, as it will reduce the tax payments, the cash position is improved.

Conclusion

Hence, (1) the physical stock of the assets would have no effect, (2) the balance sheet account would decline, (3) the reported net income would decrease and (4) the cash position will improve.

Answer 68

i.

Summary Introduction

To explain: The effects on the (1) physical stock of assets, (2) the balance sheet account for fixed assets, (3) the company’s reported net income and (4) the cash position of the company.

Answer 69

i.

Expert Solution

Answer to Problem 20IC

If the fixed assets are depreciated over 7 years rather than 10 years the effects are as follows:

(1) The physical stock of assets- There will not be any effect on the physical stock of assets.
(2) The balance sheet accounts for fixed assets- The balance sheet account for the fixed assets would reduce because the accumulated depreciation will raise as the assets are depreciating for 7 years over 10 years.
(3) The company’s reported net income- As the depreciation expense will raise, the net income would decrease.
(4) The cash position of the company- The cash position of the firm will increase, as the tax payments would be reduced.

Answer 70

i.

Expert Solution

Answer 71

i.

Expert Solution

Answer 72

Expert Solution

Answer 73

Explanation of Solution

If the depreciation year of the assets is reduced, this results in a reduction of the accumulated depreciation.
When there is less accumulated depreciation, the balance in the depreciation account would reduce.
This would also result in a declinein net income.
But, as it will reduce the tax payments, the cash position is improved.

Answer 74

Conclusion

Hence, (1) the physical stock of the assets would have no effect, (2) the balance sheet account would decline, (3) the reported net income would decrease and (4) the cash position will improve.

Answer 75

j.

Summary Introduction

To explain: The meaning and calculations of the earnings per share, dividends per share and the book value per share and the reason for the market price per share not equal to the book value per share.

j.

Expert Solution

Answer to Problem 20IC

The meaning and calculations of the given terms are as follows:

Earnings per share: The earnings per share refer to that part of the profit of the company which is divided into each of the outstanding shares of the stock of a company. It is computed by dividing the net income by the number of outstanding shares.
Dividends per share: The dividends per share refer to that sum of declared dividends that is issued by a company for each of the shares which is outstanding. This is the amount of dividend which is received by the shareholders for each number of shares. It is calculated by dividing the amount of dividend from the shares outstanding.
Book value per share: The book value per share refers to that part of common equity, which is given to each of the shareholders. It is computed by dividing the common equity by the outstanding number of shares.

The market price per share is not equivalent to the book value per share. The market value of a share reflects the profitability that can be earned by the share in the future while book value per share denotes the historic cost of the share.

Explanation of Solution

The dividends per share, earnings per share and the book value per share are the profitability ratios.
These ratios help to determine the capacity of a company and help the investor and the user understand the financial status of the company.
The market price per share is different than the book value per share as both reflect a different value.

Conclusion

Thus, the meaning and calculation of the given terms are as explained above and the market price for one share is not equal to book value per share.

Answer 76

j.

Summary Introduction

To explain: The meaning and calculations of the earnings per share, dividends per share and the book value per share and the reason for the market price per share not equal to the book value per share.

Answer 77

j.

Expert Solution

Answer to Problem 20IC

The meaning and calculations of the given terms are as follows:

Earnings per share: The earnings per share refer to that part of the profit of the company which is divided into each of the outstanding shares of the stock of a company. It is computed by dividing the net income by the number of outstanding shares.
Dividends per share: The dividends per share refer to that sum of declared dividends that is issued by a company for each of the shares which is outstanding. This is the amount of dividend which is received by the shareholders for each number of shares. It is calculated by dividing the amount of dividend from the shares outstanding.
Book value per share: The book value per share refers to that part of common equity, which is given to each of the shareholders. It is computed by dividing the common equity by the outstanding number of shares.

The market price per share is not equivalent to the book value per share. The market value of a share reflects the profitability that can be earned by the share in the future while book value per share denotes the historic cost of the share.

Answer 78

j.

Expert Solution

Answer 79

j.

Expert Solution

Answer 80

Expert Solution

Answer 81

Explanation of Solution

The dividends per share, earnings per share and the book value per share are the profitability ratios.
These ratios help to determine the capacity of a company and help the investor and the user understand the financial status of the company.
The market price per share is different than the book value per share as both reflect a different value.

Answer 82

Conclusion

Thus, the meaning and calculation of the given terms are as explained above and the market price for one share is not equal to book value per share.

Answer 83

k.

Summary Introduction

To explain: The tax treatment of (1) the payment of interest and dividends, (2) dividends received and interest earned, (3) capital gains and (4) tax loss carry-backs and carry-forwards and the effect of these items on the taxes.

k.

Expert Solution

Answer to Problem 20IC

The tax treatment for the given items is as follows:

(1) Interest and dividends paid: The payment of interest is considered as an expense and is paid out of pre-tax income. So, the payment of interest is tax deductible for a business. The payment of interest is generally not tax-deductible for the individuals, but the exception is limited to home mortgage. The payment of dividends by a business are paid out of after-tax income.
(2) Interest earned and dividends received: The interest received either by a individual or business is taxable income and is subject to taxes of standard income, except for the local and state government debt interest. The dividends gained are taxed at the rate of capital gains for the individuals. But this sometimes faces double taxation also. The portion of dividends, which is received by corporations is not included in the tax.
(3) Capital gains: The capital gains for individuals are taxed as ordinary income if it exceeds one year, and is taxed at the capital gains rate if it is held for more than one year. The capital gains for corporations are taxed as ordinary income.
(4) Tax-loss carry backs and carry forwards: The tax-loss carrybacks and carry forward provisions lets the businesses to utilize a loss in the present year to compensate the profits in the prior years and if losses have not been fully set by previous profits they can be carried forward to compensate the profits in future.

Explanation of Solution

The tax treatment is different for different kinds of heads.
The interest paid is not taxed to the individual.
The interest earned is taxable as per the subject to taxes.
The dividends are paid after the tax treatment.
The dividends received are capital gains and are subject to taxes.

Conclusion

Thus, the tax treatment for the given items is as mentioned above.

Answer 84

k.

Summary Introduction

To explain: The tax treatment of (1) the payment of interest and dividends, (2) dividends received and interest earned, (3) capital gains and (4) tax loss carry-backs and carry-forwards and the effect of these items on the taxes.

Answer 85

k.

Expert Solution

Answer to Problem 20IC

The tax treatment for the given items is as follows:

(1) Interest and dividends paid: The payment of interest is considered as an expense and is paid out of pre-tax income. So, the payment of interest is tax deductible for a business. The payment of interest is generally not tax-deductible for the individuals, but the exception is limited to home mortgage. The payment of dividends by a business are paid out of after-tax income.
(2) Interest earned and dividends received: The interest received either by a individual or business is taxable income and is subject to taxes of standard income, except for the local and state government debt interest. The dividends gained are taxed at the rate of capital gains for the individuals. But this sometimes faces double taxation also. The portion of dividends, which is received by corporations is not included in the tax.
(3) Capital gains: The capital gains for individuals are taxed as ordinary income if it exceeds one year, and is taxed at the capital gains rate if it is held for more than one year. The capital gains for corporations are taxed as ordinary income.
(4) Tax-loss carry backs and carry forwards: The tax-loss carrybacks and carry forward provisions lets the businesses to utilize a loss in the present year to compensate the profits in the prior years and if losses have not been fully set by previous profits they can be carried forward to compensate the profits in future.

Answer 86

k.

Expert Solution

Answer 87

k.

Expert Solution

Answer 88

Expert Solution

Answer 89

Explanation of Solution

The tax treatment is different for different kinds of heads.
The interest paid is not taxed to the individual.
The interest earned is taxable as per the subject to taxes.
The dividends are paid after the tax treatment.
The dividends received are capital gains and are subject to taxes.

Answer 90

Conclusion

Thus, the tax treatment for the given items is as mentioned above.

Answer 91

Ch. 3 - What four financial statements are contained in...Ch. 3 - Who are some of the basic users of financial...Ch. 3 - If a typical firm reports 20 million of retained...Ch. 3 - Explain the following statement: Although the...Ch. 3 - Prob. 5Q Ch. 3 - MVA Over the years, Masterson Corporations...Ch. 3 - Prob. 7Q Ch. 3 - Prob. 8Q Ch. 3 - How are managements actions incorporated in EVA...Ch. 3 - Explain the following statement: Our tax rates are...

Explanation of Solution

To determine: The effect of the expansion on the free cash flow. Free Cash Flow: It refers to that cash, which a company can produce after expansion. This is a degree of financial performance of a firm.

Explanation of Solution

To explain: Whether the suppliers were paid on time or not and if not the reasons for the late.

Answer to Problem 20IC

Explanation of Solution

To explain: Whether the sales price increases the costs per unit sold and if that affects the cash balance.

Answer to Problem 20IC

Explanation of Solution

To explain: The effect on the cash account and the effect on cash account if the credit policy is changed.

Answer to Problem 20IC

Explanation of Solution

To explain: The imagination of a situation in which the price of sales increases the production cost and selling output.

Answer to Problem 20IC

Explanation of Solution

To explain: The way in which the expansion program is financed and the way it affects the financial strength of the company.

Answer to Problem 20IC

Explanation of Solution

To explain: The effect of the asset expansion and whether this requires a raise in the external capital.

Answer to Problem 20IC

Explanation of Solution

To explain: The effects on the (1) physical stock of assets, (2) the balance sheet account for fixed assets, (3) the company’s reported net income and (4) the cash position of the company.

Answer to Problem 20IC

Explanation of Solution

To explain: The meaning and calculations of the earnings per share, dividends per share and the book value per share and the reason for the market price per share not equal to the book value per share.

Answer to Problem 20IC

Explanation of Solution

To explain: The tax treatment of (1) the payment of interest and dividends, (2) dividends received and interest earned, (3) capital gains and (4) tax loss carry-backs and carry-forwards and the effect of these items on the taxes.

Answer to Problem 20IC

Explanation of Solution

Want to see more full solutions like this?

Chapter 3 Solutions

To determine: The effect of the expansion on the free cash flow.

Free Cash Flow:

It refers to that cash, which a company can produce after expansion. This is a degree of financial performance of a firm.