Name: Vũ Hải Yến

Student ID: 20070389

Questions:
2. Why might the revenue and cost figures shown on a standard income
statement not be representative of the actual cash inflows and outflows that
occurred during a period?
The recognition and matching principles in financial accounting call for
revenues, and the costs associated with producing those revenues, to be
"booked" when the revenue process is essentially complete, not necessarily
when the cash is collected or bills are paid. Note that this way is not necessarily
correct; it's the way accountants have chosen to do it.
4. In comparing accounting net income and operating cash flow, name two
items you typically find in net income that are not in operating cash flow.
Explain what each is and why it is excluded in operating cash flow.
Depreciation is a non-cash deduction that reflects adjustments made in asset
book values in accordance with the matching principle in financial accounting.
Interest expense is a cash outlay, but it's a financing cost, not an operating cost.
6. Suppose a company's cash flow from assets is negative for a particular
period. Is this necessarily a good sign or a bad sign?
For a successful company that is rapidly expanding, for example, capital outlays
will be large, possibly leading to negative cash flow from assets. In general,
what matters is whether the money is spent wisely, not whether cash flow from
assets is positive or negative.
7. Suppose a company's operating cash flow has been negative for several
years running. Is this necessarily a good sign or a bad sign?
It's probably not a good sign for an established company, but it would be fairly
ordinary for a start-up, so it depends.
8. Could a company's change in NWC be negative in a given year? (Hint:
Yes.) Explain how this might come about. What about net capital
spending?
For example, if a company were to become more efficient in inventory
management, the amount of inventory needed would decline. The same might
be true if it becomes better at collecting its receivables. In general, anything that
leads to a decline in ending NWC relative to beginning NWC would have this
effect. Negative net capital spending would mean more long-lived assets were
liquidated than purchased.
9. Could a company's cash flow to stockholders be negative in a given year?
(Hint: Yes.) Explain how this might come about. What about cash flow to
creditors?
If a company raises more money from selling stock than it pays in dividends in
a particular period, its cash flow to stockholders will be negative. If a company
borrows more than it pays in interest, its cash flow to creditors will be negative.

Problems:
14. Volbeat Corp. shows the following information on its 2015 income
statement: sales = $267,000; costs = $148,000; other expenses $8,200;
depreciation expense $17,600; interest expense $12,400; taxes $32,620;
dividends = $15,500. In addition, you're told that the firm issued $6,400 in
new equity during 2015 and redeemed $4,900 in outstanding long-term
debt.
a. What is the 2015 operating cash flow?
b. What is the 2015 cash flow to creditors?
c. What is the 2015 cash flow to stockholders?
d. If net fixed assets increased by $25,000 during the year, what was the
addition to NWC?
a. The 2015 operating cash flow:
Cash flow from operations=sales – (costs + other expenses + taxes)
= 267,000 – (148,000 + 8,200+32,620) = $78,180
 Depreciation is a non-cash expense, hence is not deducted to arrive at
cash flow from operations.
 Interest expense is a financial charge and hence does not form part of
operating cash flow calculations.
b. The 2015 cash flow to creditors:
Cash flow to creditors = interest – net new long term debt
= $12,400 – (- 4,900) = $17,300
 Since the company redeemed $4,900 outstanding long term debt, the net
new long term debt is shown as a negative amount.
c. The 2015 cash flow to stockholders:
Cash flow to stockholders = dividends – new equity issue
= $15,500 - $6,400 = $9,100
d. Determination of addition to NWC when net fixed assets increase by
$25,000:
Addition to NWC
Cash flow to assets = cash flow to creditors + cash flow to stockholders
= $17,300 + $9,100 = $26,400
Cash flow to assets = operating cash flow – net capital spending – change
in NWC
Operating cash flow = $78,180
Net capital spending = increase in fixed assets + depreciation
= $25,000 + $17,600 = $42,600
Cash flow to assets = $78,180 - $42,600 – $26,400 = $9,180
19. During 2014, Raines Umbrella Corp. had sales of $675,000. Cost of
goods sold, administrative and selling expenses, and depreciation expenses
were $435,000, $85,000, and $125,000, respectively. In addition, the
company had an interest expense of $70,000 and a tax rate of 35 percent.
(Ignore any tax loss carryback or carryforward provisions.)
a. What is Raines's net income for 2014?
b. What is its operating cash flow?
a. EBIT = Sales – Cost of good solds - Administrative and Selling expenses -
Depreciation = 675,000 – 435,000 – 85,000 – 125,000 = $30,000
EBT = 30,000 – 70,000 = - $40,000
Net Income = - $40,000 + 0 = - $40,000
b. Operating cash flow = EBIT + Depreciation – Taxes = 30,000 + 125,000 – 0
= $155,000
21. Quarles Industries had the following operating results for 2015: sales
$30,096; cost of goods sold = $21,476; depreciation expense $5,341 ; interest
expense = $2,409; dividends paid = $1,716. At the beginning of the year, net
fixed assets were $18,018, current assets were $6,336, and current liabilities
were $3,564. At the end of the year, net fixed assets were $22,176, current
assets were $7,829, and current liabilities were $4,159. The tax rate for
2015 was 35 percent.
a. What is net income for 2015?
b. What is the operating cash flow for 2015?
c. What is the cash flow from assets for 2015? Is this possible? Explain.
d. If no new debt was issued during the year, what is the cash flow to
creditors? What is the cash flow to stockholders? Explain and interpret the
positive and negative signs of vour answers in (a) through (d)
a.
EBIT = Sales – Cost of goods sold – Depreciation
= $30,096 - $21,476 - $5,341 = $3,279
Taxable income = EBIT – Interest = $3,279 - $2,409 = $870
Taxes rate is 35% => Taxes = $305
The net income = 870 – 305 = $565
b. OCF = EBIT + Depreciation – Taxes = 3,279 + 5,431 – 305 = $8,405
c. Change in NWC = NWCend – NWCbeg
= (CAend – CLend) – (CAbeg – CLbeg)
= (7,829 - 4,159) – (6,336 – 3,564)
= $898
Net Capital Spending = NFAend – NFAbeg + Depreciation
= 22,176 – 18,018 + 3,279
= $7,437
CFA = OCF – Change in NWC – Net Capital Spending
= 8,405 – 898 – 7,437
= $70
The cash flow from assets can be positive or negative, since it represents
whether the firm raised funds or distributed funds on a net basis. Therfore, this
problem is possible.
d. Cash flow to creditors = Interest – Net new LTD
= 2,409 – 0 = $2,409
Cash flow to stockholders = Cash flow from assets – Cash flow to creditors
= 70 – 2,409 = - $2,339
Net New Equity = Dividends – Cash flow to stockholders
= 1,716 – (- 2,339) = $4,055
The firm had positive earnings in an accounting sense (NI > 0) and had positive
cash flow from operations. The firm invested $898 in new net working capital
and $7,437 in new fixed assets. The firm had $70 from it stakeholder support
this new investment. It accomplished this by raising $4,055 in the form of new
equity. After paying out $1,716 of this in the form of dividends to shareholders
and $2,339 in the form of interest to creditors, $70 was left to meet the firm's
cash flow needs for investment.
22. Consider the following abbreviated financial statements for Parrothead
Enterprises

a. What is owners' equity for 2014 and 2015?

b. What is the change in net working capital for 2015?
c. In 2015, Parrothead Enterprises purchased $2,080 in new fixed assets.
How much in fixed assets did Parrothead Enterprises sell? What is the cash
flow from assets for the year? (The tax rate is 35 percent.)
d. During 2015, Parrothead Enterprises raised $420 in new long-term debt.
How much long-term debt must Parrothead Enterprises have paid off
during the year? What is the cash flow to creditors?
a.
 2014 2015 2014 2015
Current Assets 1,005 1,089 Current Liabilities 402 451
Net Fixed Assets 4,144 4,990 Long-term debt 2,190 2,329
Total Liabilities 2,592 2,780
Total Assets 5,149 6,079 Total Liabilities and 5,149 6,079
Owner Equity
Owners Equity 2,557 3,299

b. NWC in 2014 = 1,005 – 402 = $603

NWC in 2015 = 1,089 – 451 = $638
 The change in Net Working Capital 2015 = 638 – 603 = 35
c. Net Capital Spending= Fixed AssetCB + Depreciation – Fixed AssetOB
= 4,990 + 1,136 – 4,144 = 1,982
Fixed Asset Sold = Net Capital Spending – Purchases = 1,982 – 2,080 = - 98
 Fixed Asset Sold = 98
EBIT = Sales – Costs – Depreciation = 12,751 – 5,946 – 1,136 = $5,569
EBT = EBIT – Interest paid = 5,569 – 323 = $5,246
 Taxes = $1,836
 Net Income = 5,246 – 1,836 = 3,410
OCF = EBIT + DEP -Taxes = 5,569 + 1,136 – 1,836 = $4,869
 Cash Flow feom Assets = OCF – Change in NWC – Net Capital
Spending
= 4,869 – 35 – 1,982 = $2,852
d.
Long-term debt (Opening Balance) 2,190
New debt 420
Total 2,610
Long-term debt (Closing Balance) 2,329
Debt retired 2,601 – 2,329 = 272

Cash flow to creditors = Interest – Net new long-term debt = 323 – (2,329-
2,190)
= 184