Question

In: Accounting

Given the following information for Macro Drive Inc. 2017 Selling and administrative expenses 150,000 Depreciation expense...

Given the following information for Macro Drive Inc.

2017

Selling and administrative expenses

150,000

Depreciation expense

280,000

Interest expense

140,000

Sales

1,400,000

Taxes

135,500

Cost of Goods Sold

500,000
  1. Prepare (in good form) an income statement for 2017 for Macro Drive Inc
  2. Assume that Micro Drive Inc. has 50,000 shares outstanding, calculate the Earnings Per Share for the company for the period ending 2017
  3. Differentiate between accounting income and free cash flow. Why is FCF the most important measure of cash flow?

Solutions

Expert Solution

a

Income statement for 2017
Particulars Amount Amount
Sales 1,400,000
Less: cost of goods sold      500,000
Gross profit 900,000
Expenses:
Depreciation      150,000
Selling and administrative expenses      150,000
Interest expense      140,000
Taxes      135,500
Total expenses 575,500
Net income 324,500

b

EPS = 324,500/ 50,000 = 6.49

c

Free cash flow or

cash flow from assets equals cash from operations adjusted for net capital spending and net investment in working capital. Cash flow from operations is net income plus interest expense if any plus depreciation. Depreciation is not a cash flow and interest expense is not an operating cash flow.

Net capital spending equals depreciation plus ending net fixed assets minus opening net fixed assets. It is the amount of cash used to purchase new fixed assets over cash generated from sale of fixed assets.

Net investment in working capital equals ending net working capital of the firm minus beginning net working capital of the firm. Net working capital means current assets less current liabilities.

It shows how much cash an entity has to invest, finance, or to do any other activities other than running business operations.

ekkarill92 answered 2 months ago
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