gchapter 3 case study: financial statements, cash flow and taxes

please answer parts a,b,c,d,e,f,g,h,i,jk

Financial Statements and Taxes Donna Jamison, a 2006 graduate of the University of Florida with 4 years of banking experience, was recently brought in as assistant to the chairperson of the board of D'Leon inc., a small food producer that operates in north Florida and whose specialty is high-quality pecan and other nut products sold in the snack foods market. D'Leon's president, Al Watkins, decided in 2010 to undertake a major expansion and to "go national" in competition with Frito-Lay, Eagle, and other major snack foods companies. Watkins believed that D'Leon's products were of higher quality than the competition's; that this quality differential would enable it to charge a premium price; and that the end result would be greatly increased sales, profits, and stock price. The company doubled its plant capocity, opened mow sales edfioes outside its home territiory, and launched an mesersive advertising canpaien. D Deon's results were not satisfactory. fo put it mildity. Its. boatrd of nvespecysle), was must upset when directors latarned how the expunsin was going- Enhappy suppliers were As a resuit. Wathins was informed that changes would have to be rides.and quickly; otherwise, he would be few of his golfing days and belp nurse the company back to health, with lamisonis help: Jamisen began by gathering the financial statements and other data given in Tables IC 3.1, IC 3.2,IC3.3, and IC 3.4. Assume that you an Jami-an's assistant. You must help her answer the folkowing quentions for Campo. (Note We We Aill continue with this case in Chapter 4 , and yora will fexi more cornfortable with the analysis there. Hut answering there questions will holp prepare you for Chapter 4. Provide chear explanations) a. What effect did the expansion have on sales, after-tas. ofkerating income, net operating working capital. Nownel, and net inceve? b. What effect did the company's expansion have on its free cash flow? c. DLeon purchass materials on 3-day terms, moaning that it is suppoced to pay for purchases within 30 days of receipt. Judging from its 2011 balance sheet, do you think that DIeon pays suppliefs on time? Fupdain, including what peoblems might occur if suppliers are not paid in a timely manrer. A. Bleen spends aloney for labor, materials, and foxed assets (depreciation) to make products-and spends. atill moe money to sell thoee products. Then the firm makes sales that result in receivables, which eventually result in cosh inflows. Does it appear that D Licon's sales price eruceeds its costs per unit sold? How dees this atfect the cash balance? e. Suppose D'Len's sales manager told the sales staff to start offering 60-day credit terms rather than the Woday terms now being offered. D'Leon's competitors react by offering similar terms, so sales remain cotstant. What effect wodid this have on the cash account? How would the cash account be affected if sales doubled as a risult of the credit policy change? 1. Can you imagine a situation in which the sales price erceds the cost of producing and selling a unit of output, jet a dramatic increase in sales volume causes the cash balance to decline? Explain. 8. Did D Leon finance its expansion program with internally generated funds (additions to retained earnumgs plus depreciation) ar with external capital? How does the chose of financing affect the company's financial strength? h. Reier to Tables IC 3.2 and 1C 3.4. Suppose DYeon broke even in 2011 in the sense that stles reventies equaled total operating costs plus interest charges. Would the abset expansion have caused the comparny to experience a cash shortage that required it to raise external capital? Explain. i. If D'Leon starts depreciating fixed assets over 7 years rather than 10 years, would that affect (1) the physical stock of assets, (2) the balance shect account for fixed assets, (3) the company's reported net income, and (4) the company's cash position? Assume that the same depneciation method is uxed foe stockholder reporting and for tax calculations and that the accotanting change hats no efficet on asses. physical Lives. I. Explain how earnings per share, dividends per share, and book value per shane are calculated and what they mean. Why does the market price per share not equal the book value per share? 1. Explain briefly the tax treatryent of (1) interest and dividends paid, (2) interest earmed and divickends received. (3) capital gains, and (4) tax loss carry.backs and carry-forwards. How might each of these items affect DrLeon's taxes? Financial Statements and Taxes Donna Jamison, a 2006 graduate of the University of Florida with 4 years of banking experience, was recently brought in as assistant to the chairperson of the board of D'Leon Inc., a small food producer that operates in north Florida and whose specialty is high-quality pecan and other nut products sold in the snack foods market. D'Leon's president, Al Watkins, decided in 2010 to undertake a major expansion and to "go national" in competition with Frito-Lay, Eagle, and other major snack foods companies. Watkins believed that D'Leon's products were of higher quality than the competition's; that this quality differential would enable it to charge a premium price; and that the end result would be greatly increased sales profits, and stock price. The company doubled its plant capacity, opened new sales offices outside its home territory, and launched an expensive advertising campaign. D'Leon's results were not satisfactory, to put it mildly. Its board of directors, which consisted of its president, vice president, and major stockholders (who were all local businespeople), was most upset when directors learned how the expansion was going. Unhappy suppliers were being paid late; and the bank was complaining about the deteriorating situation, threatening to cut off credit. As a result, Watkins was informed that changes would have to be made-and quickly; otherwise, he would be fired. Also, at the board's insistence, Donna Jamison was brought in and given the job of assistant to Fred Campo, a retired banker who was D'Leon's chairperson and largest stockholder. Campo agreed to give up a few of his golfing days and help nurse the company back to health, with Jamison's help. Jamison began by gathering the financial statements and other data given in Tables IC 3.1, IC 3.2, IC 3.3, and IC 3.4. Assume that you are Jamison's assistant. You must help her answer the following questions for Campo. (Note: We will continue with this case in Chapter 4 , and you will feel more comfortable with the analysis there. But answering these questions will help prepare you for Chapter 4. Provide clear explanations.) a. What effect did the expansion have on sales, after-tax operating income, net operating working capital (NOWC), and net income? b. What effect did the company's expansion have on its free cash flow? c. D'Leon purchases materials on 30-day terms, meaning that it is supposed to pay for purchases within 30 days of receipt. Judging from its 2011 balance sheet, do you think that D'Leon pays suppliers on time? Explain, including what problems might occur if suppliers are not paid in a timely manner. d. DLeon spends money for labor, materials, and fixed assets (depreciation) to make products-and spends still more money to sell those products. Then the firm makes sales that result in receivables, which eventually result in cash inflows. Does it appear that D'Leon's sales price exceeds its costs per unit sold? How does this affect the cash balance? e. Suppose D'Leon's sales manager told the sales staff to start offering 60 -day credit terms rather than the 30 day terms now being offered. D'Len's competitors react by offering similar terms, so sales remain constant. What effect would this have on the cash account? How would the cash account be affected if sales doubled as a result of the credit policy change? f. Can you imagine a situation in which the sales price exceeds the cost on to decline? Explain. output, yet a dramatic increase in sales volume causes the cash balance to b. Did DLeon finance its expansion program with internally generated funds (additions to retained eamings plus depreciation) or with external capital? How does the choice of financing affect the company's financial strength? h. Refer to Tables IC 3.2 and IC 3.4. Suppose D'Leon broke even in 2011 in the sense that sales revenues equaled total operating costs plus interest charges. Would the asset expansion have caused the company to experience a cash shortage that required it to raise external capital? Explain. i. If DTeon starts depreciating fixed assets over 7 years rather than 10 years, would that affect (1) the physical stock of assets, (2) the balance sheet account for fixed assets, (3) the company's reported net income, and (4) the company's cash position? Assume that the same depreciation method is used for stockholder reporting and for tax calculations and that the accounting change has no effect on assets physical lives. Explain how earnings per share, dividends per share, and book value per share are calculated and what they mean. Why does the market price per share not equal the book value per share? Explain briefly the tax treatment of (1) interest and dividends paid, (2) interest earned and dividends received, (3) capital gains, and (4) tax loss carry-backs and carry-forwards. How might each of these items affect D'Leon's taxes? Labilities and Equity income Statements T a b TC3.2 cons of goods sold Whar expenses 1citioperating costs excluding depreciation and amortization neprisiation and amortization seit nicrek expense T cosin(4096) wincorne \begin{tabular}{rr} 2011 & 2010 \\ \hline$6,034,000 & $3,432,000 \\ $,528,000 & 2,864,000 \\ $6,047,988$19,988 & $3,222,672358,672 \\ ($130,948)116,960 & $190,42818,900 \\ ($266,960)136,012 & $146,60043,828 \\ ($160,176)(106,784)n & $87,96058,640 \\ \hline \end{tabular} pook yalue per share Sock pricer Shares outstanding Taxrate Lease poyments \begin{tabular}{rrrr} \hline($ & 1.602) & $ & 0.880 \\ $ & 0.110 & $ & 0.220 \\ $ & 4.926 & $ & 6.638 \\ $ & 2.25 & $ & 8.50 \\ & 100,000 & & 100,000 \\ & 40.00% & & 40.00% \\ $ & 40,000 & $ & 40,000 \\ $ & 0 & & 0 \end{tabular} Gnking fund payments The firm had sufficient taxable income in 2009 and 2010 to obtain its full tax refund in 2011. TableIc:34 Statement of Cash. Flows, 2011 Operating Activities Net income Depreciation and amortieation. lincrease in accounts payable Increase in accruals Increase in accoumts recelvable increvse in inventories Net cash provided by operating activities (5160,176)116,960378,560353,600(280,960)(5164,176)(572,160) Long-Term Investing Activities Additions to property, plant, and equipment Nef cash used in investing activities ($711,950)($711,950) Financing Activities increase in notes payable: Increase in long-tem debt Payment of cash dividends Net cash provided by financing activities Summary Net decrease in cash Cash at beginning of year Cash at end of year (550,318)$7,28257,600 Financial Statements and Taxes Donna Jamison, a 2006 graduate of the University of Florida with 4 years of banking experience, was recently brought in as assistant to the chairperson of the board of D'Leon inc., a small food producer that operates in north Florida and whose specialty is high-quality pecan and other nut products sold in the snack foods market. D'Leon's president, Al Watkins, decided in 2010 to undertake a major expansion and to "go national" in competition with Frito-Lay, Eagle, and other major snack foods companies. Watkins believed that D'Leon's products were of higher quality than the competition's; that this quality differential would enable it to charge a premium price; and that the end result would be greatly increased sales, profits, and stock price. The company doubled its plant capocity, opened mow sales edfioes outside its home territiory, and launched an mesersive advertising canpaien. D Deon's results were not satisfactory. fo put it mildity. Its. boatrd of nvespecysle), was must upset when directors latarned how the expunsin was going- Enhappy suppliers were As a resuit. Wathins was informed that changes would have to be rides.and quickly; otherwise, he would be few of his golfing days and belp nurse the company back to health, with lamisonis help: Jamisen began by gathering the financial statements and other data given in Tables IC 3.1, IC 3.2,IC3.3, and IC 3.4. Assume that you an Jami-an's assistant. You must help her answer the folkowing quentions for Campo. (Note We We Aill continue with this case in Chapter 4 , and yora will fexi more cornfortable with the analysis there. Hut answering there questions will holp prepare you for Chapter 4. Provide chear explanations) a. What effect did the expansion have on sales, after-tas. ofkerating income, net operating working capital. Nownel, and net inceve? b. What effect did the company's expansion have on its free cash flow? c. DLeon purchass materials on 3-day terms, moaning that it is suppoced to pay for purchases within 30 days of receipt. Judging from its 2011 balance sheet, do you think that DIeon pays suppliefs on time? Fupdain, including what peoblems might occur if suppliers are not paid in a timely manrer. A. Bleen spends aloney for labor, materials, and foxed assets (depreciation) to make products-and spends. atill moe money to sell thoee products. Then the firm makes sales that result in receivables, which eventually result in cosh inflows. Does it appear that D Licon's sales price eruceeds its costs per unit sold? How dees this atfect the cash balance? e. Suppose D'Len's sales manager told the sales staff to start offering 60-day credit terms rather than the Woday terms now being offered. D'Leon's competitors react by offering similar terms, so sales remain cotstant. What effect wodid this have on the cash account? How would the cash account be affected if sales doubled as a risult of the credit policy change? 1. Can you imagine a situation in which the sales price erceds the cost of producing and selling a unit of output, jet a dramatic increase in sales volume causes the cash balance to decline? Explain. 8. Did D Leon finance its expansion program with internally generated funds (additions to retained earnumgs plus depreciation) ar with external capital? How does the chose of financing affect the company's financial strength? h. Reier to Tables IC 3.2 and 1C 3.4. Suppose DYeon broke even in 2011 in the sense that stles reventies equaled total operating costs plus interest charges. Would the abset expansion have caused the comparny to experience a cash shortage that required it to raise external capital? Explain. i. If D'Leon starts depreciating fixed assets over 7 years rather than 10 years, would that affect (1) the physical stock of assets, (2) the balance shect account for fixed assets, (3) the company's reported net income, and (4) the company's cash position? Assume that the same depneciation method is uxed foe stockholder reporting and for tax calculations and that the accotanting change hats no efficet on asses. physical Lives. I. Explain how earnings per share, dividends per share, and book value per shane are calculated and what they mean. Why does the market price per share not equal the book value per share? 1. Explain briefly the tax treatryent of (1) interest and dividends paid, (2) interest earmed and divickends received. (3) capital gains, and (4) tax loss carry.backs and carry-forwards. How might each of these items affect DrLeon's taxes? Financial Statements and Taxes Donna Jamison, a 2006 graduate of the University of Florida with 4 years of banking experience, was recently brought in as assistant to the chairperson of the board of D'Leon Inc., a small food producer that operates in north Florida and whose specialty is high-quality pecan and other nut products sold in the snack foods market. D'Leon's president, Al Watkins, decided in 2010 to undertake a major expansion and to "go national" in competition with Frito-Lay, Eagle, and other major snack foods companies. Watkins believed that D'Leon's products were of higher quality than the competition's; that this quality differential would enable it to charge a premium price; and that the end result would be greatly increased sales profits, and stock price. The company doubled its plant capacity, opened new sales offices outside its home territory, and launched an expensive advertising campaign. D'Leon's results were not satisfactory, to put it mildly. Its board of directors, which consisted of its president, vice president, and major stockholders (who were all local businespeople), was most upset when directors learned how the expansion was going. Unhappy suppliers were being paid late; and the bank was complaining about the deteriorating situation, threatening to cut off credit. As a result, Watkins was informed that changes would have to be made-and quickly; otherwise, he would be fired. Also, at the board's insistence, Donna Jamison was brought in and given the job of assistant to Fred Campo, a retired banker who was D'Leon's chairperson and largest stockholder. Campo agreed to give up a few of his golfing days and help nurse the company back to health, with Jamison's help. Jamison began by gathering the financial statements and other data given in Tables IC 3.1, IC 3.2, IC 3.3, and IC 3.4. Assume that you are Jamison's assistant. You must help her answer the following questions for Campo. (Note: We will continue with this case in Chapter 4 , and you will feel more comfortable with the analysis there. But answering these questions will help prepare you for Chapter 4. Provide clear explanations.) a. What effect did the expansion have on sales, after-tax operating income, net operating working capital (NOWC), and net income? b. What effect did the company's expansion have on its free cash flow? c. D'Leon purchases materials on 30-day terms, meaning that it is supposed to pay for purchases within 30 days of receipt. Judging from its 2011 balance sheet, do you think that D'Leon pays suppliers on time? Explain, including what problems might occur if suppliers are not paid in a timely manner. d. DLeon spends money for labor, materials, and fixed assets (depreciation) to make products-and spends still more money to sell those products. Then the firm makes sales that result in receivables, which eventually result in cash inflows. Does it appear that D'Leon's sales price exceeds its costs per unit sold? How does this affect the cash balance? e. Suppose D'Leon's sales manager told the sales staff to start offering 60 -day credit terms rather than the 30 day terms now being offered. D'Len's competitors react by offering similar terms, so sales remain constant. What effect would this have on the cash account? How would the cash account be affected if sales doubled as a result of the credit policy change? f. Can you imagine a situation in which the sales price exceeds the cost on to decline? Explain. output, yet a dramatic increase in sales volume causes the cash balance to b. Did DLeon finance its expansion program with internally generated funds (additions to retained eamings plus depreciation) or with external capital? How does the choice of financing affect the company's financial strength? h. Refer to Tables IC 3.2 and IC 3.4. Suppose D'Leon broke even in 2011 in the sense that sales revenues equaled total operating costs plus interest charges. Would the asset expansion have caused the company to experience a cash shortage that required it to raise external capital? Explain. i. If DTeon starts depreciating fixed assets over 7 years rather than 10 years, would that affect (1) the physical stock of assets, (2) the balance sheet account for fixed assets, (3) the company's reported net income, and (4) the company's cash position? Assume that the same depreciation method is used for stockholder reporting and for tax calculations and that the accounting change has no effect on assets physical lives. Explain how earnings per share, dividends per share, and book value per share are calculated and what they mean. Why does the market price per share not equal the book value per share? Explain briefly the tax treatment of (1) interest and dividends paid, (2) interest earned and dividends received, (3) capital gains, and (4) tax loss carry-backs and carry-forwards. How might each of these items affect D'Leon's taxes? Labilities and Equity income Statements T a b TC3.2 cons of goods sold Whar expenses 1citioperating costs excluding depreciation and amortization neprisiation and amortization seit nicrek expense T cosin(4096) wincorne \begin{tabular}{rr} 2011 & 2010 \\ \hline$6,034,000 & $3,432,000 \\ $,528,000 & 2,864,000 \\ $6,047,988$19,988 & $3,222,672358,672 \\ ($130,948)116,960 & $190,42818,900 \\ ($266,960)136,012 & $146,60043,828 \\ ($160,176)(106,784)n & $87,96058,640 \\ \hline \end{tabular} pook yalue per share Sock pricer Shares outstanding Taxrate Lease poyments \begin{tabular}{rrrr} \hline($ & 1.602) & $ & 0.880 \\ $ & 0.110 & $ & 0.220 \\ $ & 4.926 & $ & 6.638 \\ $ & 2.25 & $ & 8.50 \\ & 100,000 & & 100,000 \\ & 40.00% & & 40.00% \\ $ & 40,000 & $ & 40,000 \\ $ & 0 & & 0 \end{tabular} Gnking fund payments The firm had sufficient taxable income in 2009 and 2010 to obtain its full tax refund in 2011. TableIc:34 Statement of Cash. Flows, 2011 Operating Activities Net income Depreciation and amortieation. lincrease in accounts payable Increase in accruals Increase in accoumts recelvable increvse in inventories Net cash provided by operating activities (5160,176)116,960378,560353,600(280,960)(5164,176)(572,160) Long-Term Investing Activities Additions to property, plant, and equipment Nef cash used in investing activities ($711,950)($711,950) Financing Activities increase in notes payable: Increase in long-tem debt Payment of cash dividends Net cash provided by financing activities Summary Net decrease in cash Cash at beginning of year Cash at end of year (550,318)$7,28257,600