Question

Consider the following abbreviated financial statements for Parrothead Enterprises:

   

PARROTHEAD ENTERPRISES 2017 and 2018 Partial Balance Sheets
Assets								Liabilities and Owners’ Equity
		2017			2018					2017			2018
Current assets	$	1,302		$	1,435			Current liabilities	$	594		$	637
Net fixed assets		5,085			6,164			Long-term debt		2,804			2,987

  

PARROTHEAD ENTERPRISES 2018 Income Statement
Sales	$	16,066
Costs		7,279
Depreciation		1,459
Interest paid		452

  

a.	What is owners' equity for 2017 and 2018? (Do not round intermediate calculations.)
b.	What is the change in net working capital for 2018? (Do not round intermediate calculations.)
c-1.	In 2018, Parrothead Enterprises purchased $2,688 in new fixed assets. How much in fixed assets did Parrothead Enterprises sell? (Do not round intermediate calculations.)
c-2.	In 2018, Parrothead Enterprises purchased $2,688 in new fixed assets. What is the cash flow from assets for the year? The tax rate is 24 percent. (Do not round intermediate calculations.)
d-1.	During 2018, Parrothead Enterprises raised $584 in new long-term debt. How much long-term debt must Parrothead Enterprises have paid off during the year? (Do not round intermediate calculations.)
d-2.	During 2018, Parrothead Enterprises raised $584 in new long-term debt. What is the cash flow to creditors? (Do not round intermediate calculations.)

  

Answer 1

Answer a.

2017:

Owners’ Equity = Total Assets - Total Liabilities
Owners’ Equity = (Current Assets + Net Fixed Assets) - (Current Liabilities + Long-term Debt)
Owners’ Equity = ($1,302 + $5,085) - ($594 + $2,804)
Owners’ Equity = $2,989

2018:

Owners’ Equity = Total Assets - Total Liabilities
Owners’ Equity = (Current Assets + Net Fixed Assets) - (Current Liabilities + Long-term Debt)
Owners’ Equity = ($1,435 + $6,164) - ($637 + $2,987)
Owners’ Equity = $3,975

Answer b.

Change in Net Working Capital = Net Working Capital, 2018 - Net Working Capital, 2017
Change in Net Working Capital = (Current Assets, 2018 - Current Liabilities, 2018) - (Current Assets, 2017 - Current Liabilities, 2017)
Change in Net Working Capital = ($1,435 - $1,302) - ($637 - $594)
Change in Net Working Capital = $90

Answer c-1.

Net Capital Spending = Net Fixed Assets, 2018 + Depreciation - Net Fixed Assets, 2017
Net Capital Spending = $6,164 + $1,459 - $5,085
Net Capital Spending = $2,538

Net Capital Spending = Purchase of Fixed Assets - Sale of Fixed Assets
$2,538 = $2,688 - Sale of Fixed Assets
Sale of Fixed Assets = $150

Answer c-2.

EBIT = Sales - Costs - Depreciation
EBIT = $16,066 - $7,279 - $1,459
EBIT = $7,328

EBT = EBIT - Interest Paid
EBT = $7,328 - $452
EBT = $6,876

Taxes = EBT * Tax Rate
Taxes = $6,876 * 24%
Taxes = $1,650

Operating Cash Flow = EBIT + Depreciation - Taxes
Operating Cash Flow = $7,328 + $1,459 - $1,650
Operating Cash Flow = $7,137

Cash Flow from Assets = Operating Cash Flow - Net Capital Spending - Change in Net Working Capital
Cash Flow from Assets = $7,137 - $2,538 - $90
Cash Flow from Assets = $4,509

Answer d-1.

Net New Long-term Debt = Long-term Debt, 2018 - Long-term Debt, 2017
Net New Long-term Debt = $2,987 - $2,804
Net New Long-term Debt = $183

Net New Long-term Debt = Long-term Debt raised - Long-term Debt repaid
$183 = $584 - Long-term Debt repaid
Long-term Debt repaid = $401

Answer d-2.

Cash Flow to Creditors = Interest Paid - Net New Long-term Debt
Cash Flow to Creditors = $452 - $183
Cash Flow to Creditors = $269