Question

You invest $8,000 in an on-line bookstore in the form of a corporation on Jan. 2. For the sake of simplicity, you are the only shareholder who owns this corporation. You also decide to take on $10,000 liabilities with 20% annual interest rate. You spend $6,000 cash to buy books as the inventory. Throughout the year, you sell half of books to students in exchange for $9,000 cash, that is, your revenue is $9,000 and COGS is $3,000. Also, $2,000 cash dividend is paid at the end of the year. Tax rate is 40%.

All entries of balance sheet are zero at the beginning of the year (Jan. 1).

What is the cash level at the end of the year?

Answer 1

Ans :

Income Statement

Sales	$9,000
Less : COGS	$(3,000)
EBIT	$6,000
Less : Interest 20%	$(2,000)
EBT	$4,000
Less : Taxes 40%	$(1,600)
Net Income	$2,400
Less : Dividend	$(2,000)
Retained Earnings	$400

Computation of Cash flow at end of year

Particulars	Cash flow
Investment in on line bookstore	$8,000
Liabilities	$10,000
Inventory	$(3,000)
Retained Earnings	$400
Cash level at end of year	$15,400

Ans : Cash level at the end of year is $15,400