Question

Q1. Discuss the differences between operating, investing and financing activities, then describe the cash flows between a company and its stakeholders

Q2. ALHAMD Watch Company manufactures two product lines—digital watches and analog watches. Income statement data for the most recent year follow:

	Total	Digital Watches	Analog Watches
Sales revenue	$850,000	$500,000	$350,000
Variable expenses	(530,000)	(250,000)	(280,000)
Contribution margin	$320,000	$250,000	$70,000
Fixed expenses	(180,000)	(90,000)	(90,000)
Operating income (loss)	$140,000	$160,000	$(20,000)

Assuming fixed costs remain unchanged, and that there would be no adverse effect on other sales, what will be the effect of dropping the Analog Watches line on the operating income of the company?

Q3. The management of ALALI Corporation is considering a project that would require an initial investment of $331,000 and would last for 8 years. The annual net operating income from the project would be $54,000, including depreciation of $40,000. At the end of the project, the scrap value of the project's assets would be $11,000.

Required:
Determine the payback period of the project. Show your work!
(Ignore income taxes in this problem)

Q4.

Heavey Fabrication is a division of a major corporation. Last year the division had total sales of $21,120,000, net operating income of $2,006,400, and average operating assets of $6,000,000. The company's minimum required rate of return is 12%. Required: What is the division's return on investment (ROI)?

Q5.

Madrazo Corporation uses residual income to evaluate the performance of its divisions. The minimum required rate of return for performance evaluation purposes is 19%. The Games Division had average operating assets of $410,000 and net operating income of $86,000 in June. Required: What was the Games Division's residual income in June?

Answer 1

Q1) cash flow activities are classified into operating, financial and investing

Operational activities are related to cash activities these include revenues and expenditures .for example cash paid to merchandise and sales etc

investing activities are related cash and the transactions include non current assets. , for example sale fixed asset ,purchase of fixed asset.

Financing activities are related to non current liabilities like long term debt and owners equity etc

Q2 total operating income before dropping analog watches Is $160000

Of you drop the analog watches fixed cost are same and no sales adverse effects  

So you can avoid all variable expenses for the analog watches but fixed cost is in avoidable so you can't recover fixed cost of analog if you drop that one

Net profit is effected by $90000  

$160000-$90000=$70000

Q3)calculation of ALALI pay back period

PBP = (investment -scrap value)/cash in flow

= ( $331000-$11000)/94000

=3.509 years

Note : add back depreciation to the net operating income to get cash in flow

Q4) calculation of ROI of heavy fabrication

ROI= net operating income / avg operating assets

= $2006400/$6000,000

=33.4percent or 0 334

Q5)calculation of residual income of Games division

RI = Net operating income - ( avg operating assets*required rate/100)

=$86000 - ($410000*19/100)

= $86000- $77900=$81