8. Analyzing accounting data for managerial decisions

Accounting data is used to generate a firms financial statements, but a firms intrinsic value is based on its free cash flows, which are the cash flows available for distribution to the companys investors after the company has made all of the investments necessary to sustain its ongoing operations.

Consider the following case:

J&H Corp. recently hired Jeffery. His immediate mandate was to analyze the company. He has to submit a report on the companys operational efficiency and estimate its potential investment in working capital. He has the income statement from last year and the following information from the companys financial reports as well as some industry averages.

	Last year, J&H Corp. reported a book value of $700,000 in current assets, of which 15% is cash, 17% is short-term investments, and the rest is accounts receivable and inventory.
	The company reported $595,000 of current liabilities including accounts payable and accruals. Interestingly, the company had no notes payable outstanding, and there were no changes in the companys accounts payable during the year.
	The company, however, invested heavily in plant and equipment to support its operations. It reported a book value of $1,120,000 for its operating long-term assets last year.

Income Statement For the Year Ended on December 31

	J&H Corp.	Industry Average
Net sales	$15,000,000	$18,750,000
Operating costs, except depreciation and amortization	12,000,000	15,000,000
Depreciation and amortization	600,000	750,000
Total operating costs	12,600,000	15,750,000
Operating income (or EBIT)	$2,400,000	$3,000,000
Less: Interest expense	240,000	450,000
Earnings before taxes (EBT)	$2,160,000	$2,550,000
Less: Taxes (40%)	864,000	1,020,000
Net income	$1,296,000	$1,530,000

Based on the information given to him, Jeffery submits a report on January 1 with some important calculations for management to use, both for analysis and to devise an action plan.

Complete the following statements in his report. If your answer is negative, use the minus sign.

	Statement #1: J&H Corp.s NOPAT is , which is less than the industry average of .
	Statement #2: The company has no notes payable reported in its balance sheet, so its current operating liabilities total .
	Statement #3: The difference between J&Hs Corps net income and its net cash flow is attributable to its annual .
	Statement #4: J&H Corp.s total net operating capital of consists of the sum of its and its total investment in .