Financial Statements
Use these balance sheets for the following problems:
Watson Industries December 31 Balance Sheets
(in thousands of dollars)
				2013	2012
Assets
Cash and cash equivalents				$91,450	$74,625
Short-term investments				$11,400	$15,100
Accounts Receivable				$103,365	$85,527
Inventories				$38,444	$34,982
Total current assets				$244,659	$210,234
Net fixed assets				$67,165	$42,436
Total assets				$311,824	$252,670
Liabilities and equity
Accounts payable				$30,761	$23,109
Accruals				$30,477	$22,656
Notes payable				$16,717	$14,217
Total current liabilities				$77,955	$59,982
Long-term debt				$76,264	$63,914
Total liabilities				$154,219	$123,896
Common stock				$100,000	$90,000
Retained Earnings				$57,605	$38,774
Total common equity				$157,605	$128,774
Total liabilities and equity				$311,824	$252,670
a. The companys 2013 sales were $455,150,000, and EBITDA was 15 percent of sales. Furthermore, depreciation amounted to 11 percent of net fixed assets, interest charges were $8,575,000, the state-plus-federal corporate tax rate was 40 percent, and Watson pays 40 percent of its net income out in dividends. Given this information, construct Watson's 2013 income statement.
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 Watson Industries
Sales Revenue				$455,150
EBITDA as a percent of sales				15%
Depr. as a % of Fixed Assets				11%
Tax rate				40%
Interest Expense				$8,575
Dividend Payout Ratio				40%
				2013	2012
Sales					$364,120
Expenses excluding depreciation and amortization					$321,109
EBITDA					$43,011
Depreciation (Cumberland has no amortization charges)					$6,752
EBIT					$36,259
Interest Expense					$7,829
EBT					$28,430
Taxes (40%)					$11,372
Net Income					$17,058
Common dividends					$6,823
Addition to retained earnings					$10,235
b. Next, construct the firms statement of retained earnings for the year ending December 31, 2013, and then its 2013 statement of cash flows.
Statement of Retained Earnings
(in thousands of dollars)
Balance of Retained Earnings, December 31, 2012
Add: Net Income, 2013
Less: Common dividends paid, 2013
Balance of Retained Earnings, December 31, 2013
Statement of Cash Flows
(in thousands of dollars)
Operating Activities
Net Income
Adjustments:
Noncash adjustment:
Depreciation
Due to changes in working capital:
Increase in accounts receivable
Increase in inventories
Increase in accounts payable
Increase in accruals
Decrease in short-term investments
Net cash provided by operating activities				$0
Investing Activities
Cash used to acquire gross fixed assets
Net cash provided by investing activities				$0
Financing Activities
Increase in notes payable
Increase in long-term debt
Increase in common stock
Payment of common dividends
Net cash provided by financing activities				$0
Net increase/decrease in cash
Add: Cash balance at the beginning of the year
Cash balance at the end of the year
c. Calculate operating cash flow, net working capital, capital spending, and free cash flow for 2013.
Operating Cash Flow
OCF13 =	EBIT		Depreciation	-	Taxes
=		+		-
=
Net Working Capital
NWC13 =	current assets	-	current liabilities
=
=
NWC12 =	current assets	-	current liabilities
=
=
Investment in Net Working Capital
Change in NWC	NWC13	-	NWC12
=
Net Capital Spending
CAPEX13 =	Net Fixed Assets13		Net Fixed Assets12	+	Depreciation
=		-
=
Free Cash Flow
CFFA (or FCF)13 =	Operating Cash Flow	-	Net Capital Spending	-	Change in Net Working Capital
=		-
=
d. Compute the following financial ratios and interpret each group in one or two sentences
Liquidity Ratios			2013	2012
	Current Ratio
	Quick Ratio
Short General Interpretation- LIQUIDITY RATIOS (no more than 2 sentences):
Solvency Ratios
			2013	2012
	Total Debt Ratio
	Times Interest Earned Ratio
Short General Interpretation- SOLVENCY RATIOS (no more than 2 sentences):
Profitability Ratios			2013	2012
	Profit Margin
	Return on Assets
	Return on Equity
Short General Interpretation - PROFITABILITY RATIOS (no more than 2 sentences):