Problem 3: Financial Statement Analysis (30 points):

Below is the Balance Sheet for Simplicity Corporation from the previous month.

Current Assets:			Current Liabilities:
Cash:	$56,000.00		Accounts Payable	$75,000.00
Accounts Receivable:	$70,000.00		Taxes Payable:	$12,000.00
Inventory:	$70,000.00		Total Current Liabilities:	$87,000.00
Total Current Assets:	$196,000.00
Fixed Assets:			Mortgage:	$157,629.14
Property:	$210,000.00		Total Liabilities:	$244,629.14
Acc. Depreciation:	$105,000.00
Equipment:	$50,000.00		Equity:
Acc. Depreciation:	$25,000.00		Retained Earnings:	$81,370.86
Net Fixed Assets:	$130,000.00		Total Equity:	$81,370.86
Total Assets:	$326,000.00		Total L and E:	$326,000.00

Transactions throughout the current month:

1.Earn $90,000.00 in sales revenue: $40,000.00 into Accounts Receivable and $50,000.00 in cash.

2.The sales require $55,000.00 worth of inventory. $30,000.00 of additional inventory is purchased on credit and applied to the Accounts Payable.

3.$25,000.00 is collected from Accounts Receivable.

4.$35,000.00 of the Accounts Payable is due this month and must be paid in cash.

5.The mortgage payment is $2,026.55 which includes the monthly interest of 6% APR (i.e. 0.5% per month).

6.The plant is depreciated by $800.00 and the equipment is depreciated by $400.00.

7.Salary, General, and Administrative expenses are $20,000.00 and is paid in cash.

8.The tax rate is 39% and is simply accumulated in the Taxes Payable Account and paid off at the end of the year, which is six months in the future.

Develop the income statement and balance sheet for the current month given the above transactions by providing the appropriate account titles and corresponding values in the tables below.

Income Statement

Sales:
Operating Expense:
Depreciation Expense:
EBIT:
Interest Expense:
EBT:
Taxes:
EAT:
Dividend:
Paid to Retained Earnings:

Balance Sheet

Current Assets:			Current Liabilities:
Cash:			Accounts Payable
Accounts Receivable:			Taxes Payable:
Inventory:			Total Current Liabilities:
Total Current Assets:
Fixed Assets:			Mortgage:
Property:			Total Liabilities:
Acc. Depreciation:
Equipment:			Equity:
Acc. Depreciation:			Retained Earnings:
Net Fixed Assets:			Total Equity:
Total Assets:			Total L and E:

Compute the Cash Flow from Assets and reconcile the Balance Sheet (Show your work).

Cash Flow from Assets: __________________

The Statement of Cash Flows is related to the calculations for Free Cash Flow and the associated reconciliation of the balance sheet. What appears to be very different is that the working capital accounts are analyzed individually instead of simply calculating the change in net working capital. It is made of three components: Cash Flow from Operating Activities (Cash Inflows from Customers plus Cash Paid to Suppliers plus Other Operating Cash Flows plus Cash Tax Payments), Cash Flow from Investing Activities ($0.00 in this case), and Cash Flow from Financing Activities. The Net Change in Cash equals Cash Flow from Operating Activities plus Cash Flow form Investing Activities plus Cash Flow from Financing Activities.

Fill in the shaded boxes

Sales:
Less Change in Accounts Receivable:
Cash Inflows from Customers:
COGS (negative number):
Less Change in Inventory:
Plus Change in Accounts Payable:
Cash Paid to Suppliers:
SGA (negative number):
Plus Interest Expense (negative number):
Other Operating Cash Outflows:
Provision for Income Taxes (negative number):
Plus Change in Taxes Payable:
Cash Tax Payments:
Cash Flow from Operating Activities:
Cash Flow from Investing Activities:		$0.00
Change in Short-term Notes:	$0.00
Plus Change in Long-term Notes (Debt):
Plus Change in Common Stock:	$0.00
Cash Flow from Financing Activities:
Net Change in Cash:

Problem 4 (15 points):

Your firm is considering the purchase of a small outfit whose original owner has died. The owners son has inherited the business and after three years has no idea what he is doing. You have come in to make an evaluation of the business by building its balance sheet. You have the last income statement available to you. From talking to the son, you find that the inventory usually lasts 45 days (days in inventory) and that customers usually pay their bills in 60 days (days in receivables). The son does not know how many shares of stock are outstanding, but he does know that he receives $0.05 annual dividends on his shares. From receipts, you find that all of the manufacturing facilities amount to $50,000.00 and are ten years old. The depreciation has been straight line based on a twenty-five year life span. Finally, youve decided to value the stock at $1.00 par and use industry ratios to finish the job. The industry Current Ratio is 2.80 and the industry Quick Ratio is 1.80. Assume a 360 day year.

Income Statement
Revenues:	$45,000.00
COGS:	$36,000.00
SGA:	$2,000.00
Depreciation:	$2,000.00
EBIT:	$5,000.00
Interest:	$1,600.00
EBT:	$3,400.00
Tax:	$1,020.00
EAT:	$2,380.00
Paid in Dividends:	$500.00
Paid to Retained Earnings:	$1,880.00

Assume that interest is only paid on long-term debt and is 8% annually and Cash is included with the Current and Quick Ratios

Balance Sheet:
	Assets:		L and E:
Cash:		Current Liabilities:
Accounts Receivable:		L-T Debt:
Inventory:		Total Liabilities:
Total Current Assets:
Fixed Assets:	$50,000.00	Stock ($1 Par):
Acc. Depreciation:		Retained Earnings:
Net Fixed Assets:		Total Equity:
Total Assets:		Total L and E:

Problem 5: (6 points)

You have a bank account that earns 8% APR on a quarterly basis. You expect to receive three annual payments of $500.00 starting today. How much are these annual payments worth today?

(Hint: be certain to use the correct annual interest rateit is not 8%)

Answer: _______________

How much are these annual payments worth three years from today?

Answer: ________________