Read the following situations, then answer the questions that follow.

Situation 1

The Donahoo Western Furnishings Company was formed on December 31, 2017, with $1,000,000 in equity plus $500,000 in long-term debt. On January 1, 2018, all the firm's capital was held in cash. The following transactions occurred during January 2018:

January 2: Donahoo purchased $1,000,000 worth of furniture for resale. It paid $500,000 in cash and financed the balance using trade credit that required payment in 60 days.

January 3: Donahoo sold $250,000 worth of furniture that it had paid $200,000 to acquire. The entire sale was on credit terms of net 90 days.

January 15: Donahoo purchased more furniture for $200,000. This time, it used trade credit for the entire amount of the purchase, with credit terms of net 60 days.

January 31: Donahoo sold $500,000 worth of furniture, for which it had paid $400,000. The furniture was sold for 10 percent cash down, with the remainder payable in 90 days. In addition, the firm paid a cash dividend of $100,000 to its stockholders and paid off $250,000 of its long-term debt.

Situation 2

At the beginning of 2018, Mary Abrahams purchased a small business, the Maitz Company, whose income statement and balance sheets are shown below.

The firm has been profitable, but Abrahams has been disappointed by the lack of cash flows. She had hoped to have about $10,000 a year available for personal living expenses. However, there never seems to be much cash available for purposes other than business needs. Abrahams has asked you to examine the financial statements and explain why, although they show profits, she does not have any discretionary cash for personal needs. She observed, "I thought that I could take the profits and add back depreciation to find out how much cash I was generating. However, that doesn't seem to be the case. What's happening?"

Situation 3

Philip Spencer, the owner of Wholesome Foods, has hired you to evaluate his firm's financial performance. The firm's financial data is provided below, along with an average for the financial ratios that Spencer collected on several competing peer firms.

1) In Situation 1, what did Donahoo's balance sheet look like at the outset of the firm's life?

my answer:

Long Term Debt - 500,000 Cash - 1,500,000 Owner's Equity - 1,000,000

2) What did the firm's balance sheet look like after each transaction in Situation 1?

my answer:

Beg. Bal - 1,500,000 ------------------------------------------------------ Jan. 2

Assets: Cash - 1,000,000 Inventory - 1,000,000 A/R - 0 Total Assets: 2,000,000

Liabilities: Common Stock - 1,000,000 Long-Term Debt - 500,000 Accounts Payable - 500,000 R/E - 0 Total Liabilities: 2,000,000 -------------------------------------------------------- Jan. 3

Assets: Cash - 1,000,000 A/R - 250,000 Inventory - 800,000 Total Assets: 2,050,000

Liabilities: Common Stock - 1,000,000 Long-Term Debt - 500,000 Accounts Payable - 500,000 R/E - 50,000 Total Liabilities: 2,050,000 ------------------------------------------------------ Jan. 15

Assets: Cash - 1,000,000 A/R - 250,000 Inventory - 1,000,000 Total Assets: 2,250,000

Liabilities: Common Stock - 1,000,000 Long-Term Debt - 500,000 Accounts Payable - 700,000 R/E - 50,000 Total Liabilities: 2,250,000 ----------------------------------------------------- Jan. 31

Assets: Cash - 700,000 A/R - 700,000 Inventory - 600,000 Total Assets: 2,000,000

Liabilities: Common Stock - 1,000,000 Long-Term Debt - 250,000 Accounts Payable - 500,000 R/E - 50,000 Total Liabilities: 2,000,000

3) Ignoring taxes, determine how much income Donahoo, described in Situation 1, earned during January. Prepare an income statement for the month. Recognize an interest expense of one percent for the month (12 percent annually) on the $500,000 long-term debt, which has not been paid but is owed.

my answer:

Accounts Payable - 500,000 Long-term Debt - 500,000 Owner's Equity - 1,050,000 Total Loans and Equity - 2,050,000

Cash - 100,000 Inventory - 800,000 Accounts Receivable - 250,000 Total Assets - 2,050,000

4) In Situation 1, what was Donahoo's cash flow for the month of January?

My answer:

Income - 750,000 Less COGS - (600,000) Income - 150,000

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Please look over my work and answer the following questions:

5) Given the information provided by the financial statements in Situation 2, what would you tell Abrahams? (As part of your answer, calculate the firm's cash flows.

6) How would you describe the cash flow pattern for the Maitz Company described in Situation 2?

7) Compute the financial ratios discussed in the chapter and Situation 3 for Wholesome Foods for 2017 and 2018.

8) Prepare a cash flow statement for the firm described in Situation 3 for 2017 and 2018.

9) Interpret your findings for Situation 3, both for the firm's financial ratios compared to those of the peer group and for the cash flow statement.

Income Statement for the Maitz Company for 2018 SalesCostofgoodssoldGrossprofits5175,000570,000(105,000) Operating expenses: DepreciationAdministrativeexpensesSellingexpenses55,00020,00026,000 Total operating expenses Operating profits 519,0005(51,000) Interest expense Profits beforetaxes 516,000(3,000) Taxes Net profits 58,000(8,000) Ba lance Sheets for the Maitz Company for 2017 and 2018 \begin{tabular}{lrr} Assets & 2017 & 2018 \\ \hline Current assets: & & \\ Cash & 58,000 & 510,000 \\ Accounts receivable & 15,000 & 20,000 \\ Inventory & 25,00022,000 \\ Total current assets & 545,000 & 555,000 \end{tabular} Fixed assets: Grossfixed assets 550,000555,000 Debt (Liabilities) and Equity Current debt: Accounts payable Accruals Short-term notes Total current debt Long-tem debt Total debt Equity TOTAL DEBT AND EQUITY \begin{tabular}{rr} 510,000 & 512,000 \\ 7,000 & 8,000 \\ 5,000 & 5,000 \\ 522,000 & 525,000 \\ 15,000 & 15,000 \\ \hline 37,000 & $40,000 \\ 555,000 & 560,000 \\ 592,000 & $100,000 \\ \hline \end{tabular} \begin{tabular}{lrrr} A5sets & 2016 & 2017 & 2018 \\ \hline Cash & $21,000 & $20,200 & $25,000 \\ Accounts receivable & 42,000 & 33,000 & 46,000 \\ Inventory & 51,000 & 84,000 & 96,000 \\ Prepaid rent & 1,200 & 1,100 & 2,000 \\ Total current assets & $115,200 & $138,300 & $169,000 \\ Grossproperty, plant, and equipment & 650,000 & 664,000 & 740,000 \\ Accumulated depreciation & (364,000) & (394,000) & (434,000) \\ Net property, plant, and equipment & $286,000 & $270,000 & $306,000 \\ TOTALASSETS & $401,200 & $408,300 & $475,000 \\ \hline \end{tabular} Financial Ratios (Averages) Peer Companies Current ratio Retum on assets Operating profit margin Total asset turnover Debt ratio Retum on equity 1.80 16.8% 14.0% 1.20 0.50 18.0% Income Statement for the Maitz Company for 2018 SalesCostofgoodssoldGrossprofits5175,000570,000(105,000) Operating expenses: DepreciationAdministrativeexpensesSellingexpenses55,00020,00026,000 Total operating expenses Operating profits 519,0005(51,000) Interest expense Profits beforetaxes 516,000(3,000) Taxes Net profits 58,000(8,000) Ba lance Sheets for the Maitz Company for 2017 and 2018 \begin{tabular}{lrr} Assets & 2017 & 2018 \\ \hline Current assets: & & \\ Cash & 58,000 & 510,000 \\ Accounts receivable & 15,000 & 20,000 \\ Inventory & 25,00022,000 \\ Total current assets & 545,000 & 555,000 \end{tabular} Fixed assets: Grossfixed assets 550,000555,000 Debt (Liabilities) and Equity Current debt: Accounts payable Accruals Short-term notes Total current debt Long-tem debt Total debt Equity TOTAL DEBT AND EQUITY \begin{tabular}{rr} 510,000 & 512,000 \\ 7,000 & 8,000 \\ 5,000 & 5,000 \\ 522,000 & 525,000 \\ 15,000 & 15,000 \\ \hline 37,000 & $40,000 \\ 555,000 & 560,000 \\ 592,000 & $100,000 \\ \hline \end{tabular} \begin{tabular}{lrrr} A5sets & 2016 & 2017 & 2018 \\ \hline Cash & $21,000 & $20,200 & $25,000 \\ Accounts receivable & 42,000 & 33,000 & 46,000 \\ Inventory & 51,000 & 84,000 & 96,000 \\ Prepaid rent & 1,200 & 1,100 & 2,000 \\ Total current assets & $115,200 & $138,300 & $169,000 \\ Grossproperty, plant, and equipment & 650,000 & 664,000 & 740,000 \\ Accumulated depreciation & (364,000) & (394,000) & (434,000) \\ Net property, plant, and equipment & $286,000 & $270,000 & $306,000 \\ TOTALASSETS & $401,200 & $408,300 & $475,000 \\ \hline \end{tabular} Financial Ratios (Averages) Peer Companies Current ratio Retum on assets Operating profit margin Total asset turnover Debt ratio Retum on equity 1.80 16.8% 14.0% 1.20 0.50 18.0%