Question

Use the financial statements of a company to answer the 4 questions that follow it. When answering the questions (filling in the blanks), DO NOT use dollar signs, USE commas to separate thousands, DO NOT use parenthesis to denote negative numbers, USE the negative sign in front of first digit for negative numbers. Round to the nearest dollar. For example, if you obtain $200,436.75 then enter in the box: 200,437

Income Statement year ending 2016
Sales Revenues	$90,000
Cost of goods sold	54,500
Fixed costs	12,000
Selling, general, and administrative expenses	18,750
Depreciation	1,000
EBIT	3,750
Interest expense	0
Taxable Income	3,750
Taxes	750
Net Income	3,000
*** Tax rate	20%
Dividens paid	600
Partial Balance Sheet 12/31/2015
ASSETS		LIABILITIES
Current Assets		Current Liabilities
Cash	1,000	Notes payable	1,000
Accounts receivable	5,000	Accounts payable	6,800
Inventories	5,000	Total current liabilities	7,800
Total current assets	11,000	Long-term debt	22,000
		Total Liabilities	29,800
Gross Fixed assets	90,000	OWNERS’ EQUITY
Accumulated depreciation	10,000	Retained earnings	11,200
Net Fixed assets	80,000	Common stock	50,000
Intangible assets	0	Total owner's equity	61,200
TOTAL ASSETS	$91,000	TOTAL LIABILITIES & OWNER’S EQUITY	$91,000
Partial Balance Sheet 12/31/2016
ASSETS		LIABILITIES
Current Assets		Current Liabilities
Cash	3,000	Notes payable	2,000
Accounts receivable	3,000	Accounts payable	8,000
Inventories	8,000	Total current liabilities	10,000
Total current assets	14,000	Long-term debt	9,400
Gross Fixed assets	80,000	Total liabilities	19,400
Accumulated depreciation	11,000	OWNERS’ EQUITY
Net Fixed Assets	69,000	Retained earnings	13,600
Intangible assets	0	Common stock	50,000
Total long-term assets	69,000	Total owner's equity	63,600
TOTAL ASSETS	$83,000	TOTAL LIABILITIES & OWNER’S EQUITY	$83,000

DO NOT use dollar signs, USE commas to separate thousands, DO NOT use parenthesis to denote negative numbers, USE the negative sign in front of first digit for negative numbers.Round to the nearest dollar. For example, if you obtain $200,436.75 then enter in the box: 200,437

1. What is the Net Cash Flow (NCF) for 2016?

2. What is the Gross investments in fixed assets for 2016?

3. What is the investment in Net Operating Working Capital (Investment NOWC) for 2016?

4. What is the Free Cash Flow (FCF) for 2016?

Answer 1

(i) Computation of Net Cash Flow for 2016
Cash Flow Statement for the year ended 12/31/2016
Cash from operating activities
Net Operating Income	3,750
Add:
Depreciation	1,000
Net Operating Income		4,750
Adjustments for
(Increase)/Decrease in Accounts receivable		2,000
(Increase)/Decrease in Inventory		-3,000
Increase/(Decrease) in Notes payable		1,000
Increase/(Decrease) in Accounts payable		1,200
Net Cash from operations		5,950
Less: Taxes		-750
Net Cash from operating activities		5,200
Cash from investing activities
Sale of fixed assets		10,000
Net Cash from investing activities		10,000
Cash from financing activities
Repayment of Long - term debt		-12,600
Payment of dividend		-600
Net Cash from financing activities		-13,200
Net increase/(decrease) in cash		2,000
Opening balance of cash & cash equivalents		1,000
Closing balance of cash & cash equivalents		3,000
Net Cash Flow(NCF) means the net increase or decrease in cash and cash
equivalents as computed in the cash flow statement.
Hence,
Net Cash Flow for 2016		2,000
(ii) Computation of Gross investment in fixed assets
Gross investment in fixed assets is value of the gross block of the fixed
assets as shown in the Statement of Financial Position.The gross fixed
assets as on December 31,2016 is $ 80,000
Hence,
Gross investment in fixed assets for 2016		80,000
(iii) Computation of investments in Net Operating Working Capital
Net operating working capital is excess of operating current assets over
operating current liabilities.
Operating current assets include cash,accounts receivable and inventory
Operating current liabilities include accounts payable and accrued expenses.
Current loans and interest bearing liabilities are not included in operating
current liabilities
Hence, Investment in Net operating working capital for 2016 would be
calculated as under:
Operating Current Assets
Cash	3,000
Accounts receivable	3,000
Inventories	8,000
Total Operating Current Assets	14,000
Operating Current Liabilties
Accounts payable	8,000
Total Operating Current Liabilties	8,000
Computation of NOWC for 2016
Operating Current Assets	14,000
Less:Operating Current Liabilties	8,000
Net Operating Working Capital for 2016	6,000
(iv) Computation of Free Cash Flow for 2016
Free Cash Flow = Cash from Operations - Capital Expenditure
Since, there is no capital expenditure in 2016
Free Cash Flow for 2016 = Cash from Operations	5,200
Note - Capital Income is not considered while computing the free cash flow
as it is one time event and not a part of everday cash flow activities.
Hence, cash inflow from sale of fixed assets would not be considered while
calculating the free cash flow for 2016
Working Notes
Computation of Sale of Fixed Assets
	Gross Fixed Assets
Balance as on 01/01/2016	90,000
Additions: Purchase of fixed assets during 2016	0
Deletions: Sale of fixed assets during 2016 (balancing figure)	-10,000
Balance as on 12/31/2016	80,000
	Accumulated Depreciation
Balance as on 01/01/2016	10,000
Additions: Depreciation expense for 2016	1,000
Deletions: Sale of fixed assets during 2016 (balancing figure)	0
Balance as on 12/31/2016	11,000
Carrying value of fixed asset sold during 2016
Gross value of the fixed asset sold in 2016	10,000
Less: Accumulated depreciation on the asset sold	0
Net Value of the asset sold in 2016	10,000
Sales Price of the Asset sold
Net Value of the asset sold	10,000
Add/Less : Loss on sale /Profit on sale of asset	0
Sales Value of the fixed asset sold	10,000
Since, there is no entry for profit or loss on sale of fixed asset in the
income statement, we shall assume that the sales value of the fixed asset
was equal to the net value of the asset.