Solution						7/16/2015
Chapter:	2
Problem:	14
a. Cumberland Industries' most recent sales were $455,000,000; operating costs (excluding depreciation) were equal to 85% of sales; net fixed assets were $67,000,000; depreciation amounted to 10% of net fixed assets; interest expenses were $8,550,000; the state-plus-federal corporate tax rate was 40% and Cumberland paid 25% of its net income out in dividends. Given this information, construct Cumberland's income statement. Also calculate total dividends and the addition to retained earnings.
The input information required for the problem is outlined in the "Key Input Data" section below. Using this data and the balance sheet above, we constructed the income statement shown below.
Key Input Data for Cumberland Industries				2016
(Thousands of dollars)
Sales Revenue				$455,000
Expenses (excluding depreciation) as a percent of sales				85.0%
Net fixed assest				$67,000
Depr. as a % of net fixed assets				10.0%
Tax rate				40.0%
Interest expense				$8,550
Dividend Payout Ratio				25%
Cumberland Industries: Income Statement (Thousands of dollars)				2016
Sales				$455,000
Operating costs excluding depreciation				$386,750
EBITDA				$68,250
Depreciation (Cumberland has no amortization charges)				$6,700
EBIT				$61,550
Interest expense				$8,550
EBT				$53,000
Taxes (40%)				$21,200
Net income				$31,800
Common dividends				$7,950
Addition to retained earnings				$23,850
b. Cumberland Industries' partial balance sheets are shown below. Cumberland issued $10,000,000 of new common stock in the most recent year. Using this information and the results from part a, fill in the missing values for common stock, retained earnings, total common equity, and total liabilities and equity.
Dollar value of common stock issued (in thousands of dollars)				$10,000
Cumberland Industries December 31 Balance Sheets
(in thousands of dollars)
				2016	2015
Assets
Cash and cash equivalents				$91,450	$74,625
Short-term investments				11,400	15,100
Accounts Receivable				108,470	85,527
Inventories				38,450	34,982
Total current assets				$249,770	$210,234
Net fixed assets				67,000	42,436
Total assets				$316,770	$252,670
Liabilities and equity
Accounts payable				$30,761	$23,109
Accruals				30,405	22,656
Notes payable				12,717	14,217
Total current liabilities				$73,883	$59,982
Long-term debt				80,263	63,914
Total liabilities				$154,146	$123,896
Common stock					$90,000
Retained earnings					38,774
Total common equity					$128,774
Total liabilities and equity					$252,670
Check for balancing (this should be zero):
c. Construct the statement of cash flows for the most recent year.
Statement of Cash Flows
(in thousands of dollars)
				2016
Operating Activities
Net Income
Adjustments:
Noncash adjustment:
Depreciation
Due to changes in working capital:
Due to change in accounts receivable
Due to change in inventories
Due to change in accounts payable
Due to change in accruals
Net cash provided (used) by operating activities
Investing Activities
Cash used to acquire gross fixed assets
Due to change in short-term investments
Net cash provided (used) by investing activities
Financing Activities
Due to change in notes payable
Due to change in long-term debt
Due to change in common stock
Payment of common dividends
Net cash provided (used) by financing activities
Net increase/decrease in cash
Add: Cash balance at the beginning of the year
Cash balance at the end of the year
Check: cash balance in statement of cash flows should equal the cash on balance sheets as shown here:
				$91,450