Question

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YOU MUST SHOW ALL CALCULATIONS TO EARN CREDIT.

                                                                        2016                            2017

BALANCE SHEETS:

Assets:

                        Cash                                        120,000                       160,000

                        Accounts Receivable               520,000                       620,000

                        Inventory                                305,000                       290,000

                        Fixed Assets, net                    410,000                       510,000

                        Total Assets                           1,355,000                    1,580,000

Liabilities and Equity:

                        Accounts Payable                   350,000                       $375,000

                        Long-term Debt                      500,000                       625,000

                        Common Stock                       50,000                         75,000

                        Retained Earnings                   455,000                       505,000

                        Total Liabilities and Equity    1,355,000                    1,580,000

INCOME STATEMENT:

            Revenue                                                                                  3,500,000

            Cost of Goods Sold                                                                2,275,000

            General and Administrative                                                    515,000

            Depreciation Expense                                                             120,000

            Earnings Before Interest and Taxes                                        590,000

            Interest Expense                                                                     40,000

            Pretax Net Income                                                                  550,000

            Income Taxes                                                                          167,000

            Net Income                                                                             383,000

           

1. What was Gannon’s Operating Cash Flow (OCF) in 2017?
2. What was Gannon’s investment in net working capital for 2017?
3. What was Gannon’s Cash Flow to Creditors in 2017?
4. What was Gannon’s Cash Flow to Stockholders in 2017?

For questions #19-20, assume that a corporation’s pretax net income is taxable (Federal + State) based on 21% of the first $300,000, 30% of the next $400,000, and 34% of anything beyond that.

YOU MUST SHOW ALL CALCULATIONS TO EARN CREDIT:

5. If the company made $1,000,000, what is the corporation’s average tax rate?
6. If the company made $800,000, what is the corporation’s marginal tax rate?

Answer 1

Answer to Question 1:

Answer a.

Operating cash flow = Earnings before interest and taxes + Depreciation expense - Income taxes
Operating cash flow = $590,000 + $120,000 - $167,000
Operating cash flow = $543,000

Answer b.

2016:

Net working capital = Current assets - Current liabilities
Net working capital = (Cash + Accounts Receivable + Inventory) - Accounts Payable
Net working capital = ($120,000 + $520,000 + $305,000) - $350,000
Net working capital = $595,000

2017:

Net working capital = Current assets - Current liabilities
Net working capital = (Cash + Accounts Receivable + Inventory) - Accounts Payable
Net working capital = ($160,000 + $620,000 + $290,000) - $375,000
Net working capital = $695,000

Investment in net working capital = Net working capital, 2017 - Net working capital, 2016
Investment in net working capital = $695,000 - $595,000
Investment in net working capital = $100,000

Answer c.

Net new long-term debt = Long-term debt, 2017 - Long-term debt, 2016
Net new long-term debt = $625,000 - $500,000
Net new long-term debt = $125,000

Cash flow to creditors = Interest expense - Net new long-term debt
Cash flow to creditors = $40,000 - $125,000
Cash flow to creditors = -$85,000

Answer d.

Retained earnings, 2017 = Retained earnings, 2016 + Net income - Dividends
$505,000 = $455,000 + $383,000 - Dividends
Dividends = $333,000

Net new equity = Common stock, 2017 - Common stock, 2016
Net new equity = $75,000 - $50,000
Net new equity = $25,000

Cash flow to stockholders = Dividends - Net new equity
Cash flow to stockholders = $333,000 - $25,000
Cash flow to stockholders = $308,000