Question

(a) Fill in the missing values (in the six empty cells) in the income statement below XYZ Corporation Income $000's Statement 2005 2006 2007 500 600 Revenue Allowance for Adjustments & Warranty Net Revenue 650 8 592 495 641 290 205 360 232 38.7% Cost of Goods Sold Contribution Margin CM(%) Sales, General, and Administrative Expenses All Items except Depreciation Depreciation 120 20 125 110 20 20 96 2 Operating Income Other Income (no writedowns) Net Income 98 (b) A prospective buyer declined to purchase the company. Using 10 words or less, why do you think that might be? (c) What is the company's net cash flow in 2007? (d) At the end of 2006, the above company had retained earnings of $400,000. If they paid a $25,000 dividend in 2007, what are its retained earnings at the end of 2007?

Answer 1

			2005	2006	2007
	a	Revenue	500	600	650
	b	Allowance for Adjustment and Warranty	5	8	9
	c=a-b	Net Revenue	495	592	641
	d	Cost of Goods Sold	290	360	400	(641-241)
	e=c-d	Contribution Margin	205	232	241	(125+20+96)
	f=(e/a)*100	CM(%)	41.0%	38.7%	37.1%
		Sales,General and Admin Expenses:
	g	All items except depreciation	110	120	125
	h	Depreciation	20	20	20
	i=e-g-h	Operating Income	75	92	96
	j	Other Income(no write downs)	2	3	2
	k=i+j	Net Income	77	95	98
	l=(k/a)*100	Profit Margin	15.40%	15.83%	15.08%
	b	Decreasing Trend in CM(%)
		Decreasing Trend in Net Profit margin
	c	NET CASH FLOW in 2007
		Net Income	98
		Depreciation(Non Cash expense)	20
		NET CASH FLOW in 2007	118	(98+20)
	d	Retained Earning at end 2007
	m	Retained Earning at end 2006	$400,000
	n	Net Income in 2007	$98,000
	p	Dividend paid in 2007	$25,000
	q=m+n-p	Retained Earning at end 2007	$473,000