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Here are the financial results for Jerry’s corporation in 2020: Sales were $45,000, cost of goods...

Here are the financial results for Jerry’s corporation in 2020: Sales were $45,000, cost of goods sold was $36,000, the company’s assets depreciated by $5,000 and the company paid $500 in interest.

Also, for 2020 net fixed assets were $29,000 while current assets were $10,000 and current liabilities were $5,500.

These are the values for 2019: net fixed assets = $25,500, current assets = $8,800 and current liabilities = $5,000. The tax rate is 35%.

Required:

What is net income for 2020?
What is the operating cash flow for 2020?
What is the cash flow from assets for 2020? How do you interpret this result?
What is the cash flow to shareholders?

Solutions

Expert Solution

(a.) Calculation of Net Income for 2020

Below is the table showing calculation of Net Income

	2020
Sales	45000
Less :Cost of Goods Sold	36000
Gross Profit	9000
Depreciation Expense	5000
Operating Income / EBIT	4000
Interest Expenses	500
Earning Before Tax (EBT)	3500
Income Tax (35%)	1225
Net Income	2275

(b.) Calculation of Operating Cash Flow

Operating Cash Flows = Earning Before Interest and Taxes(EBIT) + Depreciation - Taxes

Operating Cash Flows = 4000 + 5000 - 1225

= 7775

(c.) Calculation of Cash Flow from Asset

Cash Flow from Asset = Operating Cash Flow - Change in Net working Capital - Net Capital Spending

= 7775 - 700 - 8500

= -1425

Negative Cash Flow from Asset menas that Firm has spent more on Capital spending.

Change in Net Working Capital = Closing Working Capital - Opening Working Capital

= (10000 - 5500) - (8800 - 5000)

= 4500 - 3800

= 700

Net Capital Spending = Changes in Net Fixed Asset + Depreciation

= (29000 − 25500) + 5000

= 8500

Calcualtion of Cash Flow to creditors

Cash Flow to creditors = Interest paid - Net New Long Term Debt

= 500 - 0

= 500

Net New long term debt is 0 as no information given.

Calcualtion of Cash Flow to Shareholder

Cash Flow from Shareholders = Cash Flow from Assets - Cash Flow from Creditors

= -1425 - 500

= - 1925

jeff jeffy answered 1 year ago

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