Question

Points: 10©2006 Capsim Management Simulations, Inc.®

Currently Attic is charged $4,382,667 Depreciation on the Income Statement of Andrews.    Andrews is planning for an increase in this depreciation. On the financial statements of Andrews will this?

Select: 1

Decrease Net Cash from Operations on the Cash Flow Statement. Have no impact on the Net Cash from Operations as depreciation appears in both Cash Flow and the Income Statement. Just impact the Balance Sheet. Increase Net Cash from Operations on the Cash Flow Statement.

igby $50,213 $11,524 Baldwin Cash Flow Statement Survey Cash flows from operating activities Net Income (Loss) Adjustment for non-cash items Andrews Chester ($27,072) $18,959 Depreciation $12,037 $0 (S889) (S876 ($678) Extraordinary gains/losses/writeoffs Changes in current assets and liabilities ($993) Accounts payable ($2.286) ($31,229) Inventory ($2,734) $57,855 Accounts receivable ($48,901) $28,968 $28,020 Net cash from operations Cash flows from investing activities Plant improvements (net) Cash flows from financing activities Dividends paid Sales of common stock Purchase of common stock Cash from long term debt issued Early retirement of long term debt Retirement of current debt Cash from current debt borrowing Cash from emergency loan $0 $0 ($4,727) ($36,274) $0 $0 ($11,104) 31,467) 8,192 $0 ($89,446) $13,462 $90,941 ($10,356) ($31,648 $32,979 ($22,322) $32,671 $64,301 ($37,084) Net cash from financing activities ($9,107) $0 Andrews $0 $20,771 Net change in cash position igby $58,663 $22,861 $21,113 $102,636 Chester Balance Sheet Survey Cash Accounts Receivable Inventory Total Current Assets Baldwin $53,612 $14,339 $17,445 $143,825 $153,564 $79,046 $88,579 $180,562 ($84,995) $95,567 $273,900 ($115,264) $158,636 $284,392 ($108,672) $175,720 $172,860 ($72,752) $100,108 Plant and equipment Accumulated Depreciation Total Fixed Assets $249,132 $237,682 Total Assets $264,298 $202,744 Accounts Payable Current Debt Long Term Debt Total Liabilities $10,574 $104,403 $73,763 $185,532 $32,979 $98,036 $138,947 $32,671 $37,236 $82,878 $97,621 $146,386 $58,466 $117,912 $264,298 $12,007 $107,859 $119,866 Common Stock $85,137 ($21,537) $63,600 $57,348 $41,387 $98,735 Retained Earnings ul $249,132 $237,682 $202,744 Total Liabilities &Owners' Equity Digby $278,139 $159,013 $11,524 $14,580 $6,084 $86,938 $8,110 $27,590 $1,025 $50,213 Income Statement Survey Sales Variable Costs (Labor, Material, Carry) Depreciation SGA (R&D, Promo, Sales, Admin) Other (Fees, Writeoffs, TQM, Bonuses) EBIT Interest (Short term, Long term) Taxes Profit Sharing Net Profit Baldwin $174,458 $101,537 $18,260 $16,074 $4,662 $33,924 $17,406 $5,781 $215 $10,522 Chester $212,246 $131,726 $18,959 $21,844 $5,278 $34,439 $17,732 $5,847 $217 $10,642 Andrews $118,494 $75,645 $12,037 $13,490 $31,467 ($14,145) $27,503 ($14,577) $0 ($27,072) Balance Sheet 2021 SSETS 2022 Common Size 00% 3.9% 577% DEFINITIONS: Common Size: The common size column simply represents each item as a percentage of total assets for that year. Cash $0 $9,739 $143,825 $0 $6,755 $112,596 ash our end-of-year cash position. Accounts Receivable: Reflects the lag between delivery Accounts Receivable and payment of your products. Inventories: The Inventory urrent value of your inventory across all products. A zero indicates your company stocked out. Unmet demand would, of course, all to your competitors. Plant & Equipment: otal Current Assets $153,564 61.6% $119,351 $180,562 ($84,995) Plant & Equipment 725% 34.1% $165,162 ($72,957) e current value of your plant. Accum Deprec: Accumulated Depreciation he total accumulated depreciation from your plant. Accts Payable: What the company urrently owes suppliers for materials and services. Current Debt: The debt the company is obligated to pay during the next year of $95,567 $92,205 otal Fixed Assets 38.4% Total Assets $249,132 100.0% $211,556 LIABILITIES & OWNERS EQUITY perations. It includes emergency loans used to keep your company solvent should you run out of cash during the year. Long Term Debt: The $7,366 $104,403 $73,763 $7,020 $89,446 $24,419 ccounts Payable urrent Debt ong Term Debt 30% 41.9% 29.6% mpany's long term debt is in the form of bonds, and this represents the total value of our bonds. Common Stock: The amount of capital invested by shareholders in the company Retained Earnings: The profits that the $120,885 otal Liabilities $185,532 745% mpany chose to keep instead of paying to shareholders as dividends $85,137 ($21,537) $85,137 $5,534 Common Stock 34.2% -8.6% Retained Earnings Total Equity Total Liab. & O. Equity $63,600 $90,671 255% $249,132 $211,556 100.0% Cash Flow Statement Cash Flows from Operating Activities 2021 ($27,072) ($42,429) $12,037 $11,011 $187 $346 ($988) ($31,229) ($44,392) ($2,984) $2,576 2022 he Cash Flow Statement examines what happened in the Cash ount during the year. Cash injections appear as positive numbers and Net Income (Loss) ash withdrawals as negative numbers. The Cash Flow Statement is an Depreciation xcellent tool for diagnosing emergency loans. When negative cash ows exceed positives, you are forced to seek emergency funding. For Accounts Payable xample, if sales are bad and you find yourself carrying an abundance of Inventory xcess inventory, the report would show the increase in inventory as a Accounts Receivable uge negative cash flow. Too much unexpected inventory could outstrip our inflows, exhaust your starting cash and force you to beg for moneyNet cash from operations o keep your company afloat $0 Extraordinary gains/losses/writeoffs ($48,901) ($74,035) Cash Flows from Investing Activities Plant Improvements Cash Flows from Financing Activities Dividends Paid Sales of Common Stock Purchase of Common Stock Cash from long term debt Retirement of long term debt ($15,400) ($13,810) Cash Flow Summary Andrews $0 ($2,946) $150 S0 ($150) $0 $0 ($23,646) $14,957 $68,146 $0 60,000 40,000 20,000 $49,344 Change in current debt (net) $64,301 $41,554 $0 ($46,291) $0 Net cash from financing activities Net change in cash position Closing cash position -20,000 40,000 $0 Operations Finance Chg. Cash Operations Investment Finance O Chg. Cash 2022 Income Statement 2022 Common Size $118,494 100.0% (Product Name:) Attic Art Ant NA NA NA NA Total $21,481 $31,496 $30,773 $34,744 $0 Sales ariable Costs $0 $0 irect Labor Direct Material Inventory Carry otal Variable $5,434$7,193 $6,075 $6,411 $9,784 $4,516 7,837 $2,717 $2,189 $15,552 $24,436 $17,273$18,384 $25,113 $33,273 $17,259 $75,645 21.2% 28.1% 14.6% 63.8% $5,602$9,406 $8,481 $0 $0 $0 Contribution $5,929$7,060 $13,500 $16,360 $42,849 36.2% argin Period Costs: Depreciation G&A: R&D $4,383$3,760 $1,960 $1,934 $166 $1,200 $1,200 $1,200 $1,200 $1,700 $1,500 $1,200 $1,200 $453 $7,596$7,509 $5,470$4,953 $12,037 $1,544 $4,800 $5,600 $1,546 $25,527 10.2% 1.3% 4.1% 4.7% 1.3% 21.5% $33 $638 $708 Promotions Sales $0 $0 Admin otal Period $280 $411 $401 $0 ($1,667 ($449) $8,030 $11,407 $0 $0 $0 $17,322 et Margin 14.6% Definitions: Sales: Unit sales times list price. Direct Labor: Labor costs incurred to produce the product that was sold. Inventory Carry Cost: the cost to carry unsold goods in inventory Depreciation: Calculated on straight-line 15-year depreciation of plant value. R&D Costs: R&D department expenditures for each product. Admin: Administration overhead is estimated at 1.5% Short Term Interest of sales. Promotions: The promotion budget for each product. Sales: The sales force budget for LonTerm Interest each product. Other: Charges not included in other categories such as Fees, Write Offs, and $31,467 ($14,145) $17,863 $9,640 ($14,577) $0 ($27,072) Other EBIT 26.6% -11.9% 15.1% 8.1% -12.3% 0.0% -22.8% laxes Profit Sharing QM. The fees include money paid to investment bankers and brokerage firms to issue new stocks or bonds plus consulting fees your instructor might assess. Write-offs include the loss youNet Pro might experience when you sell capacity or liquidate inventory as the result of eliminating a production line. If the amount appears as a negative amount, then you actually made money orn he liquidation of capacity or inventory. EBIT: Eanings Before Interest and Taxes. Short Term Interest: Interest expense based on last year's current debt, including short term debt, long term notes that have become due, and emergency loans. Long Term Interest: Interest paid on fit Variable Margins 2008 Andrews 40.0% 30.0% 20.0% 10.0% 0.0% tstanding bonds. Taxes: Income tax based upon a 35% tax rate. Profit Sharing: Profits shared ith employees under the labor contract. Net Profit: EBIT minus interest, taxes, and profit sharing Profit History Market Share History S20,000 So S20,000 S40,000 30% 20% 10% 096 2022 2018 2020 2014 2016 2018 2020 2022 2014 2016 ROEHistory Asset Turnover History 20% 0% -20% -40% 1.0 0.5 0.0 2016 2014 2016 2018 2020 2022 2014 2018 2020 2022 ROS History ROA History 20.0%- 10.0% 0.0% -10.0% 20% -40% 2016 2020 2022 2014 2016 2018 2022 2014 2018 2020

Answer 1

Increase Net Cash from Operations on the Cash Flow Statement.

Depreciation is a non-cash expense. Hence, it does not have a direct impact on the cash flows. However, this is a tax deductible expense. Hence, the cash flow statement as well as profit and loss statements are impacted indirectly by this line item. When the depreciation expense is increased, it will lower the EBIT and the tax liability for the year. It will also decrease the net income. The impact on net income will be equal to decrease of amount [additional depreciation * (1-tax rate)]. The cash flow statement is not impacted by the depreciation as depreciation is added back to the net income in the indirect method of determining cash flow from operating activities. The cash flow does however, change (increase) because of lower tax liability from higher depreciation. The increase in cash flow from operation is equal to [additional depreciation * tax rate]. Hence, we choose option D