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

Question

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

Accepted Answer

In preparing the balance sheets, remember that shareholders’ equity is the residual. With this in mind, Mara’s balance sheets are as follows:

	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

The income statement is straightforward:

MARA CORPORATION 2002 Income Statement
Sales		$ 4,507
Cost of goods sold		2,633
Depreciation		[latex]\underline{ 952}[/latex]
Earnings before interest and taxes		$ 922
Interest paid		[latex]\underline{ 196}[/latex]
Taxable income		$ 726
Taxes (35%)		[latex]\underline{ 254}[/latex]
Net income		[latex]\underline{\underline{\$ 472}}[/latex]
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:

MARA CORPORATION
2002 Operating Cash Flow
Earnings before interest and taxes	$ 922
+ Depreciation	952
– Taxes	$ 254
Operating cash flow	[latex]\underline{\underline{\$ 1,620}}[/latex]

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	[latex]\underline{\underline{\$ 1,258}}[/latex]

After calculating beginning and ending NWC, we take the difference to get the change in NWC:

Ending NWC	$1,174
- Beginning NWC	1,202
Change in NWC	- [latex]\underline{\underline{\$ 28}}[/latex]

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	[latex]\underline{\underline{\$ 390}}[/latex]

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	[latex]\underline{\underline{\$ 1,217}}[/latex]

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	[latex]\underline{1,077}[/latex]
Cash flow to stockholders	- [latex]\underline{\underline{\$ 827}}[/latex]

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).

Question 2CRS-TP1: This problem will give you some practice working with financ...

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