Question 2CRS-TP1: This problem will give you some practice working with financ...
This problem will give you some practice working with financial statements and figuring cash flow. Based on the following information for Mara Corporation, prepare an income statement for 2002 and balance sheets for 2001 and 2002. Next, following our U.S. Corporation examples in the chapter, calculate cash flow from assets, cash flow to creditors, and cash flow to stockholders for Mara for 2002. Use a 35 percent tax rate throughout. You can check your answers against ours, found in the following section.
| 2001 | 2002 | |
| Sales | $4,203 | $4,507 |
| Cost of goods sold | 2,422 | 2,633 |
| Depreciation | 785 | 952 |
| Interest | 180 | 196 |
| Dividends | 225 | 250 |
| Current assets | 2,205 | 2,429 |
| Net fixed assets | 7,344 | 7,650 |
| Current liabilities | 1,003 | 1,255 |
| Long-term debt | 3,106 | 2,085 |
In preparing the balance sheets, remember that shareholders’ equity is the residual. With this in mind, Mara’s balance sheets are as follows:
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MARA CORPORATION |
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Balance sheets as of December 31, 2001 and 2002 |
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| 2001 | 2002 | 2001 | 2002 | ||
| \Current assets | $2,205 | $2,429 | Current liabilities | $1,003 | $1,255 |
| Net fixed assets | 7,344 | 7,650 | Long-term debt | 3,106 | 2,085 |
| Equity | 5,440 | 6,739 | |||
| Total assets | \underline{\underline{\$ 9,549}} | \underline{\underline{\$ 10,079}} | Total liabilities and shareholders’ equity | \underline{\underline{\$ 9,549}} | \underline{\underline{\$ 10,079}} |
The income statement is straightforward:
| MARA CORPORATION 2002 Income Statement |
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| Sales | $ 4,507 | |
| Cost of goods sold | 2,633 | |
| Depreciation | \underline{ 952} | |
| Earnings before interest and taxes | $ 922 | |
| Interest paid | \underline{ 196} | |
| Taxable income | $ 726 | |
| Taxes (35%) | \underline{ 254} | |
| Net income | \underline{\underline{\$ 472}} | |
| Dividends | $ 250 | |
| Addition to retained earnings | 222 | |
Notice that we’ve used an average 35 percent tax rate. Also notice that the addition to retained earnings is just net income less cash dividends.
We can now pick up the figures we need to get operating cash flow:
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MARA CORPORATION |
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2002 Operating Cash Flow |
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| Earnings before interest and taxes | $ 922 |
| + Depreciation | 952 |
| – Taxes | $ 254 |
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Operating cash flow |
\underline{\underline{\$ 1,620}} |
Next, we get the net capital spending for the year by looking at the change in fixed assets, remembering to account for depreciation:
| Ending net fixed assets | $7,650 |
| – Beginning net fixed assets | 7,344 |
| + Depreciation | 952 |
| Net capital spending | \underline{\underline{\$ 1,258}} |
After calculating beginning and ending NWC, we take the difference to get the change in NWC:
| Ending NWC |
$1,174 |
| – Beginning NWC |
1,202 |
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Change in NWC |
– \underline{\underline{\$ 28}} |
We now combine operating cash flow, net capital spending, and the change in net working capital to get the total cash flow from assets:
| MARA CORPORATION | |
| 2002 Cash Flow from Assets | |
| Operating cash flow | $1,620 |
| – Net capital spending | 1,258 |
| – Change in NWC | – 28 |
| Cash flow from assets | \underline{\underline{\$ 390}} |
To get cash flow to creditors, notice that long-term borrowing decreased by $1,021 during the year and that interest paid was $196, so:
| MARA CORPORATION | |
| 2002 Cash Flow to Creditors | |
| Interest paid | $ 196 |
| – Net new borrowing | – 1,021 |
| Cash flow to creditors | \underline{\underline{\$ 1,217}} |
Finally, dividends paid were $250. To get net new equity raised, we have to do some extra calculating. Total equity was up by $6,739 – 5,440 = $1,299. Of this increase, $222 was from additions to retained earnings, so $1,077 in new equity was raised during the year. Cash flow to stockholders was thus:
| MARA CORPORATION | |
| 2002 Cash Flow to Stockholders | |
| Dividends paid | $ 250 |
| – Net new equity raised | \underline{1,077} |
| Cash flow to stockholders | – \underline{\underline{\$ 827}} |
As a check, notice that cash flow from assets ($390) does equal cash flow to creditors plus cash flow to stockholders ($1,217 – 827 = $390).