a. Britton String Corp. manufactures specialty strings for musical instruments and tennis racquets. Its most recent sales were $880 million; operating costs (excluding depreciation) were equal to 85%...
a. Britton String Corp. manufactures specialty strings
for musical instruments and tennis racquets. Its most recent sales
were $880 million; operating costs (excluding depreciation) were
equal to 85% of sales; net fixed assets were $300 million;
depreciation amounted to 10% of net fixed assets; interest expenses
were $22 million; the state-plus-federal corporate tax rate was
25%; and it paid 40% of its net income out in dividends. Given this
information, construct its income statement. Also calculate total
dividends and the addition to retained earnings. Report all dollar
figures in millions.
The input information required for the problem is outlined in the
"Key Input Data" section below. Using this data and the balance
sheet above, we constructed the income statement shown below.
Key Input Data for Britton String Corp.
2020
(Millions of dollars)
Sales Revenue
$880
Expenses (excluding depreciation)
as a percent of sales
85.0%
Net fixed assets
$300
Depr. as a % of net fixed assets
10.0%
Tax rate
25.0%
Interest expense
$22
Dividend Payout Ratio
40%
Britton String Corp.: Income Statement 2020
(Millions of dollars)
Sales
-------------------------------------------------------------------------$880
Operating costs excluding depreciatios----------------$748
EBITDA----------------------------------------------------------------------$132
Depreciation (Cumberland
has--------------------------------$30
no amortization charges)
EBIT
--------------------------------------------------------------------------$102
Interest expense
------------------------------------------------------$22
EBT----------------------------------------------------------------------------$80
Taxes (25%)
------------------------------------------------------------$20
Net
income--------------------------------------------------------------$60
Common dividends
--------------------------------------------------$24
Addition to retained
earnings---------------------------------$36
b. Britton String’s partial balance sheets follow. Britton issued
$36 million of new common stock in the most recent year. Using this
information and the results from part a, fill in the missing values
for common stock, retained earnings, total common equity, and total
liabilities and equity.
Dollar value of common stock issued
(in millions of dollars)
$36
Britton String Corp: December 31
Balance Sheets
2020
2019
(Millions of dollars)
Assets:
Cash and cash equivalents
$70
$60
Short-term investments
$46
$42
Accounts Receivable
$120
$140
Inventories
$264
$196
Total current assets
$500
$438
Net fixed assets
$300
$262
Total assets
$800
$700
Liabilities and equity:
Accounts payable
$73
$64
Accruals
$49
$60
Notes payable
$30
$39
Total current liabilities
$152
$163
Long-term debt
$217
$178
Total liabilities
$369
$341
Common stock
?
$249
Retained earnings
?
$110
Total common equity
?
$359
Total liabilities and equity
?
$700
Always check for balancing
(these should be zero):
$800.0000
$0.0000
c. Construct the statement of cash flows for the most recent
year.
Statement of Cash Flows
2020
(in thousands of dollars)
Operating Activities
Net Income
-----------------------------------------------------------------------
??
Adjustments:
Noncash adjustment:
Depreciation
----------------------------------------------------------------
??
Due to changes in working capital:
Due to change in accounts
receivable----------------------- ??
Due to change in inventories
------------------------------------- ??
Due to change in accounts payable
-------------------------- ??
Due to change in accruals
---------------------------------------- ??
____________
Net cash provided (used) by operating activities
??
____________
Investing Activities
Cash used to acquire gross fixed assets
-------------------??
Due to change in short-term
investments------------------??
__________
Net cash provided (used) by investing activities
??
___________
Financing Activities
Due to change in notes payable
---------------------------------??
Due to change in long-term
debt---------------------------------??
Due to change in common
stock--------------------------------??
Payment of common
dividends-----------------------------------??
________
Net cash provided (used) by financing activities
??
________
Net increase/decrease in cash
---------------------------------------??
Add: Cash balance at the beginning of the year------------??
______
Cash balance at the end of the year
??
______
Check: cash balance in statement
of cash flows should equal the
cash on balance sheets;
this value should be zero:
$70.000
Homework Answers
Calculation of Common Stock as on 2020 = Opening common stock as on 2019+ new issue in current year
=$249+$36=$285
Calculation of Retained Earning as on 2020=Opening balance + transfer to retained earning during the year
=$110+$36=$146
Assets:
Cash and cash equivalents
$70
$60
Short-term investments
$46
$42
Accounts Receivable
$120
$140
Inventories
$264
$196
Total current assets
$500
$438
Net fixed assets
$300
$262
Total assets
$800
$700
Liabilities and equity:
Accounts payable
$73
$64
Accruals
$49
$60
Notes payable
$30
$39
Total current liabilities
$152
$163
Long-term debt
$217
$178
Total liabilities
$369
$341
Common stock $285 $249
Retained earnings $146 $110
Total common equity $431 $359
Total liabilities and equity $800 $700
Always check for balancing
(these should be zero): $0.000 $0.0000
b.Cash flows for the most recent year.
Statement of Cash Flows
2020
(in thousands of dollars)
Operating Activities
Net Income
-----------------------------------------------------------------------
60
Adjustments:
Non cash adjustment:
Depreciation
---------------------------------------------------------------- 30
(See Note :1)
Due to changes in working capital:
Due to change in accounts
receivable----------------------- 20
Due to change in inventories
------------------------------------- (68)
Due to change in accounts payable
-------------------------- 9
Due to change in accruals
---------------------------------------- (11)
____________
Net cash provided (used) by operating activities 40
____________
Investing Activities
Cash used to acquire gross fixed assets
-------------------(68) See Note :2
Due to change in short-term
investments------------------(4)
__________
Net cash provided (used) by investing activities (72)
_________
Financing Activities
Due to change in notes payable
---------------------------------(9)
Due to change in long-term
debt---------------------------------39
Due to change in common
stock--------------------------------36
Payment of common
dividends-----------------------------------(24)
________
Net cash provided (used) by financing activities 42
________
Net increase/decrease in cash
-------------------------------10
Add: Cash balance at the beginning of the year------------60
______
Cash balance at the end of the year 70
______
Check: cash balance in statement
of cash flows should equal the
cash on balance sheets;
this value should be zero:
$70.000
Note :1 Calculation of Depreciation
=10%of asset=300*10%=30
Note :2 Calculation Of asset Purchased
| Particular | Amount($) | Particular | Amount($) |
| To Balance b/d(opening balance) | 262 | By Depreciation | 30 |
| To Cash (Balancing Figure) | 68 | By balance c/d (closing balance) | 300 |
| 330 | 330 |
Note :3 () denotes for negative value
Note 4: While preparing Cash Flow Remember the following rule
| Current Liability increase | Add in operating activity |
| Current Liability Decrease | Subtract in operating activity |
| Current Asset Decrease | Add in operating activity |
| Current Asset Increase | Subtract in operating activity |
Investing Activity
| Purchase Of Asset | Subtract |
| Sale Of Asset | Addition |
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