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Solution

7/16/2015

Chapter:

2

Problem:

14

a. Cumberland Industries' most recent sales were $455,000,000; operating costs (excluding depreciation) were equal to 85% of sales; net fixed assets were $67,000,000; depreciation amounted to 10% of net fixed assets; interest expenses were $8,550,000; the state-plus-federal corporate tax rate was 40% and Cumberland paid 25% of its net income out in dividends. Given this information, construct Cumberland's income statement. Also calculate total dividends and the addition to retained earnings.

The input information required for the problem is outlined in the "Key Input Data" section below. Using this data and the balance sheet above, we constructed the income statement shown below.

Key Input Data for Cumberland Industries

2016

(Thousands of dollars)

Sales Revenue

$455,000

Expenses (excluding depreciation) as a percent of sales

85.0%

Net fixed assest

$67,000

Depr. as a % of net fixed assets

10.0%

Tax rate

40.0%

Interest expense

$8,550

Dividend Payout Ratio

25%

Cumberland Industries: Income Statement (Thousands of dollars)

2016

Sales

$455,000

Operating costs excluding depreciation

$386,750

EBITDA

$68,250

Depreciation (Cumberland has no amortization charges)

$6,700

EBIT

$61,550

Interest expense

$8,550

EBT

$53,000

Taxes (40%)

$21,200

Net income

$31,800

Common dividends

$7,950

Addition to retained earnings

$23,850

b. Cumberland Industries' partial balance sheets are shown below. Cumberland issued $10,000,000 of new common stock in the most recent year. Using this information and the results from part a, fill in the missing values for common stock, retained earnings, total common equity, and total liabilities and equity.

Dollar value of common stock issued (in thousands of dollars)

$10,000

Cumberland Industries December 31 Balance Sheets

(in thousands of dollars)

2016

2015

Assets

Cash and cash equivalents

$91,450

$74,625

Short-term investments

11,400

15,100

Accounts Receivable

108,470

85,527

Inventories

38,450

34,982

Total current assets

$249,770

$210,234

Net fixed assets

67,000

42,436

Total assets

$316,770

$252,670

Liabilities and equity

Accounts payable

$30,761

$23,109

Accruals

30,405

22,656

Notes payable

12,717

14,217

Total current liabilities

$73,883

$59,982

Long-term debt

80,263

63,914

Total liabilities

$154,146

$123,896

Common stock

????

$90,000

Retained earnings

????

38,774

Total common equity

????

$128,774

Total liabilities and equity

????

$252,670

Check for balancing (this should be zero):

c. Construct the statement of cash flows for the most recent year.

Statement of Cash Flows

(in thousands of dollars)

2016

Operating Activities

Net Income

????

Adjustments:

Noncash adjustment:

Depreciation

????

Due to changes in working capital:

Due to change in accounts receivable

????

Due to change in inventories

????

Due to change in accounts payable

????

Due to change in accruals

????

Net cash provided (used) by operating activities

????

Investing Activities

Cash used to acquire gross fixed assets

????

Due to change in short-term investments

????

Net cash provided (used) by investing activities

????

Financing Activities

Due to change in notes payable

????

Due to change in long-term debt

????

Due to change in common stock

????

Payment of common dividends

????

Net cash provided (used) by financing activities

????

Net increase/decrease in cash

????

Add: Cash balance at the beginning of the year

????

Cash balance at the end of the year

????

Check: cash balance in statement of cash flows should equal the cash on balance sheets as shown here:

$91,450