(5.00) Company A has following income statement for 2017. Income Statement 2017 Revenue 1,000.00 COGS (650.00) Gross profit 350.00 Operating expense Salary Expense (80.00) Bad Debt Expense (5.00) Depreciation expense (34.50) Supplies expense Rent expense (12.00) Other operating expense (80.00) Stock based compensation (20.00) Other income and expense Interest expense on N/P (5.75) Interest expense on BIP (4.00) Interest Revenue 3.50 Unrealized gains on STI 1.00 Dividend revenue 7.50 Gain on Sale of Equipment 5.00 Impairment of goodwill (20.00) Loss on Inventory write-down (1.00) Income from Continuing Operations before Taxes 99.75 Income Tax expense (39.90) Gain on the discontinued operations, net of taxes 10.00 Net income 69.85 Less : Preferred Dividends (12.00) Net income to Common Stock holders 57.85 It's important to note that company pays tax after it closes the book. In other words, income tax payable on 2016, 37 was paid in 2017, and 39.9 will be paid in 2018. Also unrealized gain on STI is taxed at 40%. In fact, 39.9 (same number on tax payable 2017) = 40% of 99.75. Also I am ignoring tax portion from discontinued operation in this discussion and for convenience. Land Balance Sheet as of December 31 of 2017 2016 Assets Current Assets Cash 93.25 207 25 Short term investment 15.00 14.00 AR 100.00 90.00 less : Allowance for Doubtful Accounts (10.00) (18.00) Interest receivable 5.00 1.75 Inventory 18.00 15.00 Allowance for Inventory (1.00) 0.00 Supplies 7.00 4.00 Prepaid Rent 200 5.00 Other prepaid operating expense 10.00 20.00 Dividend receivable 3.00 6.50 Other assets 10.00 0.00 Current Assets, Total 252.25 345.50 Property, Plants and Equipment 140.00 120.00 Building 140.00 80.00 Less: Accumulated Depreciation - Building (30.00) (8.00) Equipment 80.00 60.00 Less : Accumulated Depreciation - Equipment (30.00) (40.00) PPE, Total 300.00 212.00 Long term investment Available for sales securities 24.00 0.00 Held-to-maturity securities 50.00 50.00 LTI, Total 74.00 50.00 Intangible Trademark 50.00 0.00 Goodwill 80.00 100.00 Intangible, Total 130.00 100.00 Total Assets 756.25 707.50 Liabilities Current Liabilities Accounts Payable 40.00 55.00 Unearned Revenue 33.00 52.00 Salary payable 16.00 24.00 Interest payable on Note payable 1.50 2.50 Income tax payable 39.90 37.00 Dividend payable 10.00 0.00 Current liabilities, Total 140.40 170.50 Long term liabilities Notes payable 80.00 50.00 Bonds payable 100.00 100.00 Long term liabilities, Total 180.00 150.00 Total Liabilities 320.40 320.50 Equities Preferred Stock - $10 par 80.00 80.00 Common Stock issued, $2 par) 124.00 120.00 Additional Paid-in Capital - Common Stock 268.00 240.00 Retained Earnings 117.85 70.00 Accumulated Other Comprehensive Income (14.00) (13.00) Less Treasury stock (140.00)(110.00) Total Equities 435.85 387.00 Total Liabilities and Equities 756.25 707.50 Notes for cash flows statement 1. Unless you see gains/losses, assume there is no sale of respective assets, nor the redemption of respective note/bond payable. 2. Any gains or losses are non-cash. Gain on the sale of discontinued operations is all NON-CASH, it has been charged to Other assets on balance sheet. 3. Interest Revenue is from Held-to-maturity securities (issued at par), 7% interest rate. 4. Available-for-sale securities is stock investment, and commands cash dividend each year. That is, AFS is the source of dividend revenue. 5. Purchase of Building in 2017 was partially financed by the direct exchange of additional Notes Payable issued during 2017 6. All the debt (note and bonds payable) are issued at par. 7.60% of Accounts Payable is attributable to Inventory, and the rest 40% is attributable to Other Prepaid Operating Expense. For Supplies and Rent, the company always pays cash. 8. On 5/1/17, the company issued 2 shares of common stock for cash. 9. Equipment on 12/31/2016 consists of two types, A and B. Additional Equipment (how much?), Type C was acquired on 1/1/2017 for cash. As of 12/31/2013, the data on Equipment are : Depreciation details 1/1/2013 71/17 Straight line (6 years). $0 residual value Not sold Straight line (6 years). $0 residual value Accumulated depreciation of $40 ($20 from A and $20 from B) Type Cost Date Acquired Date Sold $30 $30 1/1/2013 Total $60 Assume that FA (investment) includes the following : Cash, STI, AFS, HTM and their related receivable accounts (interest and dividend receivable, etc) and FL (debt) includes: notes payable, bonds payable and related payable accounts (interest, etc). a Prepare a table for cash flows from operating activities (CFO) using direct method. For each line items, provide details (formula, calculations and comments) In particular, you are looking for these items filled. Direct method CFO 1 Cash received from customer 2 Cash received from Interest 3 Cash received from dividend DEDUCT: 4 Cash paid to Suppliers 5 Cash paid to Employees 6 Cash paid for Supplies 7 Cash paid to Rent 8 Cash paid to other operating exp 9 Cash paid for interest (N/P) 10 Cash paid for interest (B/P) 11 Cash paid for tax CFO 78.50 b. Prepare a table for cash flows from operating activities (CFO) using indirect method. For each line items, provide details (formula, calculations and comments) CFO should be 78.50 c. Prepare a table for cash flows from investing activities (CFI) and provide capital expenditure, CapEx. For each line items, provide details (formula, calculations) CFI should be -162.50 d. Prepare a table for cash flows from financing activities (CFF). For each line items, provide details (formula, calculations) CFF should be -30 Note that a. CFO + CFI + CFF = Change in Cash and b. direct method CFO = indirect method CFO. e. Determine FCF by examining your direct method operating cash flows, cash flows from investing and cash flows from financing. Determine your line items in them whether it is earned on operating or financing. Per your decision of each line item, calculate your free cash flows in operating perspective (earned on operating). For example, cash received from customers are operating, and it's part of free cash flows in operating perspective. Provide your best estimate on FCF. Remember FCF is a measure or concept, not exactly cash. F. Per definition of FCF in financing perspective, namely, The surplus cash generated from operating activities recognized in the profit and loss account. This expresses a company's internal financing power, which can be used for investments, the repayment of debt, dividend payments and to meet funding requirements.", calculate FCF and compare with A. If there is difference with your answer to A, why do you think it is different? G. Determine FCF based on our formula : Comp NOPAT - Change in NOA. Why do you think there is difference between this and answer to A? H. Determine FCF per financing perspective, FCF = Comp Financial Expense, net - Change in Net Debt + Net Div. Net debt = debt - investment, and reconcile with the answer to C (5.00) Company A has following income statement for 2017. Income Statement 2017 Revenue 1,000.00 COGS (650.00) Gross profit 350.00 Operating expense Salary Expense (80.00) Bad Debt Expense (5.00) Depreciation expense (34.50) Supplies expense Rent expense (12.00) Other operating expense (80.00) Stock based compensation (20.00) Other income and expense Interest expense on N/P (5.75) Interest expense on BIP (4.00) Interest Revenue 3.50 Unrealized gains on STI 1.00 Dividend revenue 7.50 Gain on Sale of Equipment 5.00 Impairment of goodwill (20.00) Loss on Inventory write-down (1.00) Income from Continuing Operations before Taxes 99.75 Income Tax expense (39.90) Gain on the discontinued operations, net of taxes 10.00 Net income 69.85 Less : Preferred Dividends (12.00) Net income to Common Stock holders 57.85 It's important to note that company pays tax after it closes the book. In other words, income tax payable on 2016, 37 was paid in 2017, and 39.9 will be paid in 2018. Also unrealized gain on STI is taxed at 40%. In fact, 39.9 (same number on tax payable 2017) = 40% of 99.75. Also I am ignoring tax portion from discontinued operation in this discussion and for convenience. Land Balance Sheet as of December 31 of 2017 2016 Assets Current Assets Cash 93.25 207 25 Short term investment 15.00 14.00 AR 100.00 90.00 less : Allowance for Doubtful Accounts (10.00) (18.00) Interest receivable 5.00 1.75 Inventory 18.00 15.00 Allowance for Inventory (1.00) 0.00 Supplies 7.00 4.00 Prepaid Rent 200 5.00 Other prepaid operating expense 10.00 20.00 Dividend receivable 3.00 6.50 Other assets 10.00 0.00 Current Assets, Total 252.25 345.50 Property, Plants and Equipment 140.00 120.00 Building 140.00 80.00 Less: Accumulated Depreciation - Building (30.00) (8.00) Equipment 80.00 60.00 Less : Accumulated Depreciation - Equipment (30.00) (40.00) PPE, Total 300.00 212.00 Long term investment Available for sales securities 24.00 0.00 Held-to-maturity securities 50.00 50.00 LTI, Total 74.00 50.00 Intangible Trademark 50.00 0.00 Goodwill 80.00 100.00 Intangible, Total 130.00 100.00 Total Assets 756.25 707.50 Liabilities Current Liabilities Accounts Payable 40.00 55.00 Unearned Revenue 33.00 52.00 Salary payable 16.00 24.00 Interest payable on Note payable 1.50 2.50 Income tax payable 39.90 37.00 Dividend payable 10.00 0.00 Current liabilities, Total 140.40 170.50 Long term liabilities Notes payable 80.00 50.00 Bonds payable 100.00 100.00 Long term liabilities, Total 180.00 150.00 Total Liabilities 320.40 320.50 Equities Preferred Stock - $10 par 80.00 80.00 Common Stock issued, $2 par) 124.00 120.00 Additional Paid-in Capital - Common Stock 268.00 240.00 Retained Earnings 117.85 70.00 Accumulated Other Comprehensive Income (14.00) (13.00) Less Treasury stock (140.00)(110.00) Total Equities 435.85 387.00 Total Liabilities and Equities 756.25 707.50 Notes for cash flows statement 1. Unless you see gains/losses, assume there is no sale of respective assets, nor the redemption of respective note/bond payable. 2. Any gains or losses are non-cash. Gain on the sale of discontinued operations is all NON-CASH, it has been charged to Other assets on balance sheet. 3. Interest Revenue is from Held-to-maturity securities (issued at par), 7% interest rate. 4. Available-for-sale securities is stock investment, and commands cash dividend each year. That is, AFS is the source of dividend revenue. 5. Purchase of Building in 2017 was partially financed by the direct exchange of additional Notes Payable issued during 2017 6. All the debt (note and bonds payable) are issued at par. 7.60% of Accounts Payable is attributable to Inventory, and the rest 40% is attributable to Other Prepaid Operating Expense. For Supplies and Rent, the company always pays cash. 8. On 5/1/17, the company issued 2 shares of common stock for cash. 9. Equipment on 12/31/2016 consists of two types, A and B. Additional Equipment (how much?), Type C was acquired on 1/1/2017 for cash. As of 12/31/2013, the data on Equipment are : Depreciation details 1/1/2013 71/17 Straight line (6 years). $0 residual value Not sold Straight line (6 years). $0 residual value Accumulated depreciation of $40 ($20 from A and $20 from B) Type Cost Date Acquired Date Sold $30 $30 1/1/2013 Total $60 Assume that FA (investment) includes the following : Cash, STI, AFS, HTM and their related receivable accounts (interest and dividend receivable, etc) and FL (debt) includes: notes payable, bonds payable and related payable accounts (interest, etc). a Prepare a table for cash flows from operating activities (CFO) using direct method. For each line items, provide details (formula, calculations and comments) In particular, you are looking for these items filled. Direct method CFO 1 Cash received from customer 2 Cash received from Interest 3 Cash received from dividend DEDUCT: 4 Cash paid to Suppliers 5 Cash paid to Employees 6 Cash paid for Supplies 7 Cash paid to Rent 8 Cash paid to other operating exp 9 Cash paid for interest (N/P) 10 Cash paid for interest (B/P) 11 Cash paid for tax CFO 78.50 b. Prepare a table for cash flows from operating activities (CFO) using indirect method. For each line items, provide details (formula, calculations and comments) CFO should be 78.50 c. Prepare a table for cash flows from investing activities (CFI) and provide capital expenditure, CapEx. For each line items, provide details (formula, calculations) CFI should be -162.50 d. Prepare a table for cash flows from financing activities (CFF). For each line items, provide details (formula, calculations) CFF should be -30 Note that a. CFO + CFI + CFF = Change in Cash and b. direct method CFO = indirect method CFO. e. Determine FCF by examining your direct method operating cash flows, cash flows from investing and cash flows from financing. Determine your line items in them whether it is earned on operating or financing. Per your decision of each line item, calculate your free cash flows in operating perspective (earned on operating). For example, cash received from customers are operating, and it's part of free cash flows in operating perspective. Provide your best estimate on FCF. Remember FCF is a measure or concept, not exactly cash. F. Per definition of FCF in financing perspective, namely, The surplus cash generated from operating activities recognized in the profit and loss account. This expresses a company's internal financing power, which can be used for investments, the repayment of debt, dividend payments and to meet funding requirements.", calculate FCF and compare with A. If there is difference with your answer to A, why do you think it is different? G. Determine FCF based on our formula : Comp NOPAT - Change in NOA. Why do you think there is difference between this and answer to A? H. Determine FCF per financing perspective, FCF = Comp Financial Expense, net - Change in Net Debt + Net Div. Net debt = debt - investment, and reconcile with the answer to C