Question

You have a bike store. Your assets consist of $10,400 in inventory, $1,000 in equipment (phones, computers, etc.) and $600 cash. You are capitalized with $10,000 owners’ equity and $2,000 debt at 6%. Assume your only variable cost are the bikes you purchase from the manufacturer, $60/bike. Your fixed costs total $2500. During the year you purchased 250 bikes and sold them at $80/bike. But you only paid for half the bikes you bought; the rest were sold to you “on credit.” Your profits tax rate is 20%. What is your ROE for the year? You “took out” all the profits. Do the “money in – money out” to calculate the net change in cash for the year. What does your balance sheet look like at the end of the year?

Answer 1

To calculate ROE, we first need net income. So we will make Profit and Loss account.

As per the given information:

Profit or Loss:

Particulars	Working	Amount
Sales	250*80	$       20,000
Less: Purchase	250*60	$       15,000
EBIT	Sales-cost	$         5,000
Less: fixed cost		$         2,500
Less : interest	2000*6%	$             120
EBT		$         2,380
Less: tax	20%*EBT	$             476
Net profit		$         1,904

ROE=	Net Income/ shareholders’ Equity
Shareholders’ Equity (given)	$       10,000
ROE	=(1904/10000)*100
	19.04%

Now, to calculate the net cash flow:

Net cash Change:		Amount
Cash Inflow:
Sales		$       20,000
Net cash inflow	A	$       20,000
Cash outflow:
Purchases	50%*15000	$         7,500
Fixed cost		$         2,500
Tax		$             476
Interest		$             120
Dividend		$         1,904
Net cash outflow	B	$       12,500
Cash at the beginning	C	$             600
Net change in cash / cash at the end of the year	A-B+C	$         8,100

Balance sheet
Liability	Amount	Asset	Amount
shareholders’ Equity	$ 10,000	Equipment	$         1,000
6% Debt	$ 2,000	Inventory	$       10,400
Account payable (50% of 15000)	$ 7,500	cash at the end of the year	$         8,100
Total	$ 19,500	Total	$ 19500