Cash Flow for Mara Corporation This problem will give you some practice working with financial statements and figuring cash flow.

Question

Cash Flow for Mara Corporation 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 1999 and balance sheets for 1998 and 1999. 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 1999. Use a 35 percent tax rate throughout. You can check your answers against ours, found in the following section.

1999	1998
$4,507	$4,203	Sales
2,633	2,422	Cost of goods sold
952	785	Depreciation
196	180	Interest
250	225	Dividends
2,429	2,205	Current assets
7,650	7,344	Net fixed assets
1,255	1,003	Current liabilities
2,085	3,106	Long-term debt

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:

MARA CORPORATION
Balance sheets as of December 31, 1998 and 1999

1999	1998		1999	1998
$ 1,255	$1,003	Current liabilities	$ 2,429	$2,205	Current assets
2,085	3,106	Long-term debt	[latex]\underline{7,650}[/latex]	[latex]\underline{7,344}[/latex]	Net fixed assets
[latex]\underline{6,739}[/latex]	[latex]\underline{5,440}[/latex]	Equity
[latex]\underline{\underline{ \$10,079}}[/latex]	[latex]\underline{\underline{\$9,549}}[/latex]	Total liabilities and shareholders’ equity	[latex]\underline{\underline{ \$10,079}}[/latex]	[latex]\underline{\underline{\$9,549}}[/latex]	Total assets

The income statement is straightforward:

MARA CORPORATION
1999 Income Statement

$4,507	Sales
2,633	Cost of goods sold
[latex]\underline{952}[/latex]	Depreciation
$ 922	Earnings before interest and taxes
[latex]\underline{196}[/latex]	Interest paid
$ 726	Taxable income
[latex]\underline{254}[/latex]	Taxes (35%)
[latex]\underline{\underline{\$ 472}}[/latex]	Net income
$250	Dividends
222	Addition to retained earnings

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
1999 Operating Cash Flow

Earnings before interest and taxes	$ 922
+ Depreciation	952
-Taxes	[latex]\underline{\$ 254}[/latex]
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:

$7,650	Ending net fixed assets
7,344	-Beginning net fixed assets
[latex]\underline{952}[/latex]	+Depreciation
[latex]\underline{\underline{\$1,258}}[/latex]	Net capital spending

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

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

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
1999 Cash Flow from Assets

$1,620	Operating cash flow
1,258	-Net capital spending
[latex]\underline{-28}[/latex]	-Change in NWC
[latex]\underline{\underline{\$ 390}}[/latex]	Cash flow from assets

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
1999 Cash Flow to Creditors

$ 196	Interest paid
[latex]\underline{-1,021}[/latex]	-Net new borrowing
[latex]\underline{\underline{\$ 1,217}}[/latex]	Cash flow to creditors

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
1999 Cash Flow to Stockholders

$ 250	Dividends paid
[latex]\underline{1,077}[/latex]	-Net new equity raised
-[latex]\underline{\underline{\$ 827}}[/latex]	Cash flow to stockholders

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 2.S-T.1: Cash Flow for Mara Corporation This problem will give you so...

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