Question

In: Accounting

Prescott Football Manufacturing had the following operating results for 2019: sales = $30,874; cost of goods...

Prescott Football Manufacturing had the following operating results for 2019: sales = $30,874; cost of goods sold = $21,992; depreciation expense = $3,610; interest expense = $614; dividends paid = $905. At the beginning of the year, net fixed assets were $20,452, current assets were $1,797, and current liabilities were $5,330. At the end of the year, net fixed assets were $23,287, current assets were $4,601, and current liabilities were $3,301. The tax rate for 2019 was 25 percent.

a. What is the net income for 2019?

b. What is the operating cash flow for 2019?

c. What is the cash flow from assets for 2019?

d. Assume no new debt was issued during the year. What is the cash flow to creditors for 2019?

e. Assume no new debt was issued during the year. What is the cash flow to stockholders for 2019?

***negative answers should be indicated by a minus sign.

Expert Solution

Answer:

a)

Calculation of Net income:

Particulars	Amount	Amount
Sales		$ 30,874
Less: Cost of goods sold		$ 21,992
Less: Depreciation		$ 3,610
Earnings before interest and taxes(EBIT)	$ 30,874 - $ 21,992 - $ 3,610 = $ 5,272	$ 5,212
Less: Interest exp		$ 614
Earnings before Taxes(EBT)	$ 5,212 - $ 614 = $ 4,658	$ 4,658
Less: Tax at 25%	= $ 4,658 * 25% = $ 1,164.5	$ 1,164.5
Net income	$ 4,658 - $ 1,164.5 = $ 3,493.5	$ 3,493.5
Less: Dividend		$ 905
Retained earnings	$ 3,493.5 - $ 905 = $ 2,588.5	$ 2,588.5

b)

Calculation of Operating cash flow:

Operating cash flow

= EBIT + Depreciation exp - Taxes

= $ 5,272 + $ 3,610 - $ 1,164.5

= $ 7,717.5

$ 7,717.5

c)

Calculation of Cash flow from assets:

Cash flow from assets

= Cash fow to creditors + cash flow to stock holders

= $ 614 + (- $ 4,174.5)

= - $ 3,560.5

-$3,560.5

d)

Calculation of cash flow to creditors;

Cash flow to creditors

= Interest exp - Net new borrowings

= $ 614 - $ 0

= $ 614

$ 614

e)

Calculation of cash flow to stocholders:

Equity at the end	= Fixed assets + current assets - current liabilities = $23,287 + $4,601 - $3,301 = $ 24,587	$ 24,587
Less: Equity at the beginning	= Fixed assets + current assets - current liabilities = $20,452 + $1,797 - $5,330. = $ 16,919	$ 16,919
Less: Retained earnings		$ 2,588.5
New net equity	$ 24,587 - $ 16,919 - 2,588.5 = $ 5,079.5	$ 5,079.5
Cash flow to stockholders	Dividends paid - New net equity = $ 905 - $ 5,079.5 = - 4,174.5	-$4,174.5

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