Homework Answers
Answer :
a) Calculation of net income for 2019
| Particulars |
Amount ($) |
| Sales | 29,874 |
| (-) Cost of good sold | 21,632 |
| (-) Depreciation expenses | 3,470 |
| EBIT | 4,772 |
| (-) Interest expense | 514 |
| EBT | 4,258 |
| (-) Tax @ 24% | 1,022 |
| Net Income | 3,236 |
Therefore the net income for 2019 is $3,236.
b) Calculation of the operating cash flows for 2019
Operating cash flows = Earning Before Interest and Tax + Depreciation - Taxes
=$4,772 + $3,470 - $1,022
=$7,220.
Therefore the operating cash flow is $7,220.
c) The following steps indicate the cash flow from assets for 2019.
Step 1: Calculate the net capital spending.
Net capital spending = (closing value of net fixed assets - beginning value of net fixed assets + depreciation expense)
= $22,987 - $19,872 + $3,470
= $6,585
Step 2: Calculate the change in net working capital.
Change in net working capital = ( ending net working capital - beginning net working capital )
=[(ending current assets - ending current liabilities) - (beginning current assets - beginning current liabilities)]
=[($4,381 - $2,981) - ($3,557 - $3,110)]
=[$1,400 - $447]
=$953.
Step 3: Calculate the cash flow from asset for 2019.
Cash flow from asset = (Operating cash flow - Capital spending - Change in working capital)
= $7,220 - $6,585 -$953
= - $318.
Therefore the cash flow from assets for 2019 is - $318.
Yes, it is possible to have the negative cash flow from assets when a firm's cash outflow is more than its cash inflow.
The sum of cash flow to creditors and cash flow to stockholders is equal to the cash flow from assets .
Hence, the firm can get extra amount either by raising debt or by issuing new common stock to meet its requirements.
i.e. cash outflow.
d) Calculate the cash flow to creditors.
Cash flow to creditors = Interest paid - New debt issued
= $514 - $0
= $514
Therefore the cash flow to creditors is $514.
Calculate the cash flow to stockholders.
Cash flow from assets = Cash flow to creditors + Cash flow to stockholders
Cash flow to stockholders = Cash flow from assets - Cash flow to creditors
=-$318 - $514
=-$832.
Therefore the cash flow to creditors is -$832.
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