Question
Situation 2 At the beginning of 2015, Mary Abrahams purchased a small business, the Maitz Company, whose income statement and balance sheets are shown below.
Situation 2
At the beginning of 2015, Mary Abrahams purchased a small business, the Maitz Company, whose income statement and balance sheets are shown below.
Income Statement for the Maitz Company for 2015
Sales $175,000
Cost of goods sold (105,000)
Gross profits $ 70,000
Operating expenses:
Depreciation $ 5,000
Administrative expenses 20,000
Selling expenses 26,000
Total operating expenses $ (51,000)
Operating profits $ 19,000
Interest expense (3,000)
Profits before taxes $ 16,000
Taxes (8,000)
Net profits $ 8,000
Balance Sheets for the Maitz Company for2014 and2015
Assets20142015
Current assets:
Cash$ 8,000$ 10,000
Accounts receivable15,00020,000
Inventory22,00025,000
Total current assets$45,000$ 55,000
Fixed assets:
Gross fixed assets$50,000$ 55,000
Accumulated depreciation(15,000)(20,000)
Net fixed assets$35,000$ 35,000
Other assets12,00010,000
TOTAL ASSETS$92,000$100,000
Debt (Liabilities) and Equity
Current debt:
Accounts payable$10,000$ 12,000
Accruals7,0008,000
Short-term notes5,0005,000
Total current debt$22,000$ 25,000
Long-term debt15,00015,000
Total debt$37,000$ 40,000
Equity$55,000$ 60,000
TOTAL DEBT AND EQUITY$92,000$100,000
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?" Question 1 Given the information provided by the financial statements, what would you tell Abrahams? (As part of your answer, calculate the firm's cash flows.) Question 2 How would you describe the cash flow pattern for the Maitz Company?
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Survey Of Accounting
Authors: Thomas Edmonds, Philip Olds, Frances McNair, Bor-Yi Tsay
1st Edition
0073526770, 9780073526775
