Problem 3-6

Fred Klein started his own business recently. He began by depositing $5,000 of his own money (equity) in a business account. Once he'd done that his balance sheet was as follows.

Assets		Liabilities and Equity
Cash	$5,000	Equity	$5,000
Total Assets	$5,000	Total	$5,000

During the next month, his first month of business, he completed the following transactions. (All payments were made with checks out of the bank account.)

Purchased $3,000 worth of inventory, paying $1,500 down and owing the vendor the remainder.

Used $500 of the inventory in making product.

Paid employees' wages on the last day of the month of $1,100.

Sold all the product made in the first month on credit for $3,000.

Paid rent of $1,100.

Construct a balance sheet for Fred's business at the end of its first month. (Hint: Fred's business has only current assets, current liabilities, and an equity account. Calculate the ending balance in each of the current accounts from the information given. The ending equity account balance will be the difference between the current assets and liabilities at month end.) Enter all amounts as positive numbers.

ASSETS		LIABILITIES
Cash	$	Payables	$
Receivables		Current Liabilities	$
Inventory
Current Assets	$	Equity	$
Total Assets	$	Total Liabilities and Equity	$

Construct Fred's income statement. (Hint: Fred's revenue is the credit sale. His costs/expenses consist of the inventory used in product sold plus the things other than inventory for which he wrote checks. Ignore taxes.)

Revenue		$
Less Cost/Expense
	Wages	$
	Inventory
	Rent
		$
	Net Income	$

Construct Fred's statement of cash flows for the month. (Hint: Fred's beginning balance sheet has only two accounts, cash and equity, each with a $5,000 balance. All other accounts open with zero balances.) Use a minus sign, to indicate any decreases in cash or cash outflows. If an amount is zero, enter "0".

STATEMENT OF CASH FLOWS
Cash Flow From Operating Activities
	Net Income		$
	Depreciation
	Net changes in current accounts
			$
Cash Flow From Investing Activities			$
Cash Flow From Financing Activities			$
		Net Cash Flow	$
Reconciliation
	Beginning cash		$
	Net Cash Flow		$
	Ending Cash		$

Is Fred's business profitable in an accounting sense? In a cash flow sense? The input in the box below will not be graded, but may be reviewed and considered by your instructor.

Can the business fail while making a profit? How might that happen in the next month or so? The input in the box below will not be graded, but may be reviewed and considered by your instructor.

ALSO PLEASE HELP WITH ...

Problem 3-10

A group of investors is considering buying the Wheelwright Corporation, but does not want to contribute to the companys financial support after the purchase. Wheelwrights management has offered the following financial statements covering last year ($M omitted):

Wheelwright Corporation
Balance Sheets
	ASSETS
	Beginning	Ending
Cash	6	9
Accts receivable	13	20
Inventory	12	7
CURRENT ASSETS	31	36
Fixed Assets
Gross	100	115
Accumulated depreciation	(12)	(18)
Net fixed assets	88	97
TOTAL ASSETS	119	133
	LIABILITIES & EQUITY
Accts payable	17	21
Accruals	6	8
CURRENT LIABILITIES	23	29
Debt	71	59
Equity	25	45
TOTAL LIABILITIES & EQUITY	119	133

Wheelwright Corporation
Income Statement
Sales	100
COGs*	36
Depreciation	6
Gross Margin	58
Expenses	24
EBIT	34
Interest	6
EBT	28
Tax	8
Net income	20
*Cost of Goods Sold

Wheelwright paid no dividends and sold no new stock during the year. The firms tax rate is 40%.

Develop Wheelwrights free cash flow and make a recommendation as to whether it seems to be an appropriate acquisition for the investors. Round your answer to one decimal place. Enter your answer in million of dollar.

Free Cash flow $ millions The input in the box below will not be graded, but may be reviewed and considered by your instructor.

Assume that the investors will purchase the company subject to its existing debt ($59M). Does that change your recommendation?