Question

Problem 3-6 Financial Statements (LO1,4)

South Sea Baubles has the following (incomplete) balance sheet and income statement.

BALANCE SHEET AT END OF YEAR
(Figures in $ millions)
Assets	2015			2016			Liabilities and Shareholders' Equity	2015			2016
Current assets	$	100		$	190		Current liabilities	$	70		$	90
Net fixed assets		900			1,000		Long-term debt		650			850

INCOME STATEMENT, 2016
(Figures in $ millions)
Revenue	$	2,000
Cost of goods sold		1,080
Depreciation		400
Interest expense		250

a&b. What is shareholders’ equity in 2015 and 2016? (Enter your answers in millions.)

c&d. What is net working capital in 2015 and 2016? (Enter your answers in millions.)

e. What are taxes paid in 2016? Assume the firm pays taxes equal to 35% of taxable income. (Do not round intermediate calculations. Enter your answer in millions rounded to 2 decimal places.)

f. What is cash provided by operations during 2016? (Do not round intermediate calculations. Enter your answer in millions rounded to 2 decimal places.)

g. Net fixed assets increased from $900 million to $1,000 million during 2016. What must have been South Sea’s gross investment in fixed assets during 2016? (Enter your answer in millions.)

Answer 1

a&b). Owners’equity = Total assets - Total liabilities

Shareholders' Equity(2015) = (100 + 900) - (70 + 650) = 1,000 - 720 = $280 millions

Shareholders' Equity(2015) = (190 + 1,000) - (90 + 850) = 1,190 - 940 = $250 million

c&d). Net working Capital = Current Assets - Current Liabilities

Net Working Capital(2015) = 100 - 70 = $30 million

Net Working Capital(2016) = 190 - 90 = $100 million

e). Taxable Income = Revenue - Cost of Goods Sold - Depreciation - Interest Expense

= 2,000 - 1,080 - 400 - 250 = $270 million

Taxes Paid = Taxable Income * Tax Rate = 270 * 0.35 = $94.50 million

f). Net Income =Taxable Income - Taxes Paid = 270 - 94.50 = $175.50 million

Cash flow provided by operations = Net Income + Non-cash expenses - Increase in net working capital

= Net Income + Depreciation + Increase in Current Liabilities - Increase in Current Assets

= 175.50 + 400 + (90 - 70) - (190 - 100)

= 575.50 + 20 - 90 = $505.50 million

g). Gross investment = Increase in net fixed assets + depreciation

= ($1,000 - $900) + $400 = $500 million