上海对外贸易学院财管中加财务报表分析课后练习答案cha3 cha4.doc

Cha 3 5.La. (i)Statement of Cash Flows - Indirect Method Cash from operations:Net income$1,080Add noncash expense: depreciation 600Add/Subtract changes in working capital:Accounts receivable(150)Inventory(200)Accruals 80Accounts payable 120 (150) $1,530Cash from investing:Capital expenditures 1,150Cash from financing:Short term borrowing 550Long-term repayment (398)Dividends (432) $(280)Net change in cash $ 100Worksheet for (Indirect Method) Cash Flow Statement IncomeBalance SheetCashStatement12/31/0012/31/01ChangeEffectNet income$1,080 $1,080Depreciation 600 600Accounts receivable $1,500 $1,650 $150 (150)Inventory 2,000 2,200 200 (200)Accruals 800 880 80 80Accounts payable 1,200 1,320 120 120Depreciation (600) (600)Net fixed assets 6,500 7,050 550 (550) Capital expenditures$(1,150)Note payable 5,500 6,050 550 550 Short-term borrowing $ 550Long-term debt 2,000 1,602 (398) (398) Long-term debt repayment $ (398)Net income (1,080) (1,080)Retained earnings 500 1,148 648 648 Dividends paid $ (432)_ 0 $ 100The worksheet to create the cash flow statement is presented above. Each balance sheet change (other than cash) is accounted for and matched with its corresponding activity. As a last check, the net income and the add-backs of non-cash items are balanced and “closed” to their respective accounts (PP&E and retained earnings) providing the amounts of capital expenditures and dividends.a. (ii) Statement of Cash Flows - Direct MethodCash from Operations: Cash collections $9,850 Cash payments for merchandise(6,080) Cash paid for SG&A(920) Cash paid for interest(600) Cash paid for taxes(720)$1,530Cash for Investing Activities:Capital expenditures(1,150)Cash for Financing Activities:Short-term borrowing 550Long-term debt repayment ( 398)Dividends ( 432)$( 280)Net Change in Cash $ 100The worksheet to create the cash flow statement is presented below. Each balance sheet change (other than cash) is accounted for and matched with its corresponding activity. Furthermore the operating account changes are matched to their corresponding income statement item. As a last check, the net income is balanced and “closed” to retained earnings providing the amount of dividends.Note that there is no difference between the indirect and direct methods in the cash flow statement and in the worksheet for cash for investing and financing activities, Worksheet for (Direct Method) Cash Flow StatementIncomeBalance SheetCashStatement12/31/0012/31/01ChangeEffectSales$10,000$10,000Accounts receivable$ 1,500$ 1,650$ 150 (150) Cash Collections$ 9,850COGS (6,000) (6,000)Inventory 2,000 2,200 200 (200)Accounts payable 1,200 1,320 120 120Cash Paid for Merchandise$(6,080)SG&A expense (1,000) (1,000)Accruals 800 880 80 80 Cash Paid for SG&A$ (920)Interest expense (600) (600) Cash Paid for Interest$ (600)Taxes (720) (720) Cash Paid for Taxes$ (720)Depreciation (600) (600)Net fixed assets 6,500 7,050 550 (550)Capital Expenditures$(1,150)Note payable 5,500 6,050 550 550Short-term Borrowing$ 550Long-term debt 2,000 1,602 (398) (398) Long-term Debt Repaid$ (398)Net income (1,080) (1,080)Retained earnings 500 1,148 648 648 Dividends $ (432)_ _$ 0 $ 1006.La.Exhibit 3P-3 does not provide the (changes in the) individual components that make up the changes in working capital. As such, to create the direct method cash flow statement, we must obtain the information directly from the balance sheet. This procedure does not necessarily yield the same cash flow components using the direct method as those provided by the company in its indirect method calculations. Differences may arise when1. there are acquisitions/divestments2. there are foreign exchange adjustments3. the firm aggregates or classifies investing accruals together with operating ones.In this case, the differences are minimal as indicated below. (The calculations required for the direct method cash flow statement are presented in Exhibit 3S-1 along with the assumptions used to generate the statement)Direct Method Cash Flow Statement(Exhibit 3S-1)Indirect Method (Exhibit 3P-3)DifferenceCash collections$348,627Cash for suppliers (246,100)Cash expenses (94,791)Interest paid (5,303)Tax paid (2,127)Cash From Operations$ 4,560$4,398$ 162Cash From investments (4,251) (4,089) (162)Cash From Financing 215 215 -Change in cash $ 524$ 524 -Exhibit 3S-1: Direct Method Statement of Cash FlowsIncome Balance Balance StatementSheetSheet2001 12/31/006/30/2001ChangeCash EffectSales$342,215$ 342,215Accounts receivable91,636 85,224 (6,412) 6,412Cash collections$ 348,627Cost of goods sold(238,799) (238,799)Inventories163,206158,451 (4,755) 4,755Accounts payable 84,734 72,678(12,056) (12,056)Cash inputs $(246,100)Operating expenses (91,795) (91,795)Other current assets 1,426 1,843 417 (417)Prepaid expenses & other assets 55,566 56,630 1,064 (1,064)Accrued expenses* 17,679 16,299 (1,380) (1,380)Postretirement benefit obligation 2,265 2,130 (135) (135)Cash expenses $ (94,791)Interest expense (5,128) (5,128)Interest payable* 175 0 (175) (175)Interest paid $ (5,303)Tax expense (831) (831)Income tax receivable 4,116 2,889 (1,227) 1,227Income tax payable 1,130 2,383 1,253 1,253Deferred income taxes 18,096 18,574 478 478Tax paid$ 2,127Cash flow from operations 4,560Depreciation expense (4,732) (4,732)Fixed assets 91,108 90,966 (142) 142Investments in joint ventures 9,714 9,591 (123) 123Minority interest 971 1,187 216 216Cash flow from investments $ (4,251)Current portion of long-term debt 3,425 3,425 - 0Long-term debt161,135165,799 4,664 4,664Dividends paid* (4,461)Other - change in stockholders equity 12Cash flow from financing$ 215Net Income (check) 930 Net change in cash$ 524* Assumed change in interest payable to conform to interest paid.* From the indirect methodb. 1st 6 Months199619971998199920002001TotalsCFO$34,915$ 5,165$(23,528)$73,597$(18,606)$4,560$ 76,103CFI(38,007)(42,977) (46,767) (13,500) (9,017) (4,251)(154,519)$(3,092)$(37,812)$(70,295) $60,097$(27,623)$ 309$(78,416)CFF 4,230 38,782 70,474 (60,473) 27,124 215 80,352As noted in Box 3-2, from 1996 to 2000, the company generated free cash flow (CFO less net capital expenditures) of $1.5 million, during the first six months the A. M. Castle added another $309 thousand. However, Box 3-2 also showed that over the five-year period, Castle paid nearly $50 million in dividends and borrowed nearly $130 million to finance its investments and acquisitions. This trend continued in the first six months of 2001 during which the firm borrowed an additional $4.664 million to help pay its dividends and meet capital expenditure needs.Cash generated from operations from 1996 through the end of the first 6 months of 2001 was $76 million but the company spent $154 million to replace productive capacity and for investments and acquisitions. When free cash flows is calculated on this basis (i.e. CFO CFI) there is a shortfall of $78 million. This shortfall as well as dividend payments were financed by borrowing over the same period. The inability to meet its capital and dividend needs from operations clearly indicated that either the dividend would have to be reduced or the company would not be able to remain competitive and/or grow as needed. 9.LThe cash flow statement shows a steady deterioration in CFO; albeit CFO remains positive. Income (before extraordinary items) on the other hand increases steadily at approximately 8%-10% per year.To explain the discrepancy between the pattern of income and CFO, we first compute the direct method cash flow statement and then compare the cash flow components with their income statement counterparts. The (abbreviated) cash flow statement under the direct method is presented below:Years Ended December 31199219931994Cash from operating activities: Collections from customers $2,119,563 $2,420,961 $ 2,744,159 Payments for merchandise (1,502,414) (1,742,149) (2,064,815) Payments for SG&A (453,449) (523,474) (601,575) Interest paid (37,883) (33,367) (33,948) Taxes paid (12,414) (22,989) (8,408) Other (plug) (13,263) (247) (4,619)$ 100,140 $ 98,735 $ 30,794 Cash for investing activities: Capital expenditures (48,878) (110,534) (90,009) Acquisition of leaseholds (30,602) (21,894) (8,025) $ (85,480)$ (132,428)$ (98,034)Cash for financing activities: Long-term borrowings (3,276) (23,831) (19,432) Revolving credit borrowings 70,243 Proceeds from sale of stock, options and warrants 1,995 54,460 1,050 $ (1,281)$ 30,629 $ 51,861Net change in cash$ 13,379 $ (3,064) $ (15,379)The required calculations for the operating items are presented in Exhibit 3S-2 on page 21. The last item “other” is the plug amount used to arrive at the CFO presented in the indirect cash flow statement (Exhibit 3P-4). Exhibit 3S-2Worksheet for Operating Items for Direct Method SoCF199219931994Sales$ 2,127,684 2,414,124 $ 2,748,634 Change in receivables (8,121) 6,837 (4,475)Cash Collections$ 2,119,563 2,420,961 $ 2,744,159 COGS (1,527,731) (1,742,276) (1,975,332)Change in inventory (28,401) (60,893) (82,863)Change in accounts payable 53,718 61,020 (6,620)Payments to Suppliers$(1,502,414)$(1,742,149)$(2,064,815)SG&A expense (458,804) (520,685) (605,538)Change in prepaid expenses 1,317 (2,137) (3,358)Change in accrued wages 4,038 (652) 7,321 Payments for SG&A$ (453,449)$ (523,474)$ (601,575)Interest expense (39,934) (34,904) (34,948)Amortization of debt issuance costs 2,051 1,537 1,000 Interest paid$ (37,883)$ (33,367)$ (33,948)Tax expense (25,507) (26,152) (27,569)Change in taxes payable 9,003 2,662 17,567 Deferred taxes 4,090 501 1,594 Taxes paid$ (12,414)$ (22,989)$ (8,408)The comparison of the cash flow and income statement components is presented below:199219931994%change 1992-93%change 1993-94%change 1992-94Sales2,127,684 2,414,124 2,748,634 13.5%13.9%29.2%Cash collections 2,119,563 2,420,961 2,744,159 14.2%13.3%29.5%Collections/Sales99.61%100.28%99.84%COGS(1,527,731)(1,742,276)(1,975,332)14.0%13.4%29.3%Payments to suppliers(1,502,414)(1,742,149)(2,064,815)16.0%18.5%37.4%Payments/COGS98.34%99.99%104.53%SG&A expense (458,804) (520,685) (605,538)13.5%16.3%32.0%Payments for SG&A (453,449) (523,474) (601,575)15.4%14.9%32.7%Payments/SG&A98.83%100.54%99.35%Credit and collections do not seem to be responsible for the deterioration in CFO. A comparison of cash collections with sales indicates that collections increased at a slightly faster pace than sales. The collections/sales ratio increased from 99.61% in 1992 to 99.84% in 1994. Inventory, however, is another matter. Payments for inventory increased by 37% whereas COGS increased by only 29%. This is indicative of inventory being bought and paid for but not being sold. The proportion of payments to COGS increased accordingly from 98.3% to 104.5% in two years. This 6% increase translates (based on COGS of close to $2,000,000) to an increased annual cash requirement of $120,000. Thus, the first cause of Radlocs problems seems to be inventories. Its income may be overstated as inventory may have to be written down if it cannot be sold. Even if inventory is eventually sold and the purchases now being made now are able to satisfy future growth, the firm may still face liquidity problems as it requires cash to purchase (and carry) the new inventory. However, as CFO is still positive the firm may still be a good candidate for credit. Further insights as to the impact of growth can be seen if we compare free cash flow (CFO - CFI) with income and CFO. 1992 19931994Earnings before extraordinary items$37,262$41,378$44,359 CFO100,140 98,735 30,794 Free Cash Flow 14,660 (33,693) (67,240)Although income rises, CFO and free cash flow fall. CFO exceeds income in 1992 and 1993 as the noncash depreciation addback increases CFO relative to income. By 1994, however, CFO, (although positive) falls below income. This indicates that the firm may have problems in covering the replacement of current productive capacity. Free cash flow is negative in 1993 and 1994 and “barely” positive in 1992. This indicates that the firms growth (in addition to inventory) requires cash that Radloc cannot supply internally. Where did the cash come from?In 1993, it met its cash requirements by issuing stock; in 1994 the firms short term debt increased considerably as it drew down its revolving credit lines.Thus, the loan should not be granted as the firm seems to be facing an increasing liquidity crisis.Note: Radloc is an anagram for Caldor, a chain of discount stores. The data in Exhibit 3P-4 were taken from Caldors published financial statements. Caldor filed for Chapter 11 bankruptcy soon after the 1994 statements were published. Cha 48.La.CompanyIndustry1Chemicals and drugs (Monsanto)2Aerospace (Boeing)3Computer software (Altos Computer)4Department stores (J.C. Penney)5Consumer foods (Quaker Oats)6Electric utility (SCEcorp)7Newspaper publishing (Knight Ridder)8Consumer finance (Household Finance)9Airline (AMR Corp.)b.The airline, consumer finance, and electric utility industries are service industries. They are characterized by the absence of cost of goods sold and inventories. Companies 6, 8, and 9 have the lowest ratios (COGS/sales and inventories/total assets). Newspaper publishing may also be considered a service industry; we will return to this later.Company 8 is the consumer finance company. It has a high level of debt balanced by a high level of receivables and investments (loans and securities). Much of its debt is short-term, reflecting the short maturities of its loans. It has almost no fixed assets. The ratio of interest expense to revenues is the highest for this company.Both the electric utility and airline firms would have high fixed assets; utilities generally have higher assets (lower asset turnover), are more profitable, and have higher debt and interest expense. Airlines, on the other hand, have high current liabilities for trade payables (payments to suppliers) and for advance ticket sales (other current liabilities). We conclude that company 6 is the electric utility and company 9 is the airline.Companies 1, 2, and 3 have high R&D expense, consistent with the aerospace, chemicals and drugs, and computer software industries. Aerospace would have the highest inventory (low inventory turnover). Customer prepayments under long term contracts result in lower receivables and large customer advances (other current liabilities). Therefore, company 2 is the aerospace firm.Distinguishing company 1 from company 3 is difficult. Computer software and drugs are both characterized by high R & D. The inclusion of chemicals, however, should lower the intensiveness of R&D, suggesting that company 3 is the computer software firm. Computer software, lacking manufacturing, is less capital intensive than chemicals and drugs and the latter is generally more profitable. Further, the chemical industry (being older) should have older plant (greater proportion depreciated). Company 1 is, therefore, the chemical and drugs firm and company 3 is in the computer software industry.Companies 4, 5, and 7 remain. Company 4 has high inventories and COGS, the highest receivable