You work for ABC Inc., the great widget manufacturer. It is now December 2021. The accounting of the company has got a bit confused and your task is to put it back together. Here is the data you have:

ABC had cash holdings of $ 1,200 million at the end of 2020.

At the end of 2020, ABC had $ 500 million in commercial paper (a form of short-term debt) redeemable (to be repaid) during 2021. It also had $ 1,800 million in other forms of short-term debt, payable during 2021. It had $ 4,000 million in long-term debt. It also had paid-in capital (common stock) with a book value of $ 3,200 million, as well as $ 2,500 million in retained earnings from previous years. ABC had 50 million shares at the end of 2019.

ABC had accounts receivable of $ 800 million at the end of 2020. Accounts payable were $ 580 million at the same point in time, while inventories were $ 1,400 million.

ABC owned land valued at $ 4,500 million at the end of 2020, as well as buildings with an initial gross value of $ 2,900 million and equipment with an initial gross value of $ 2,800 million.

The accumulated depreciation of buildings and equipment at the end of 2020 was $ 1,200 million. (There usually is no depreciation for land.) ABC does not pay dividends.

ABC had a patent with a net value of $ 180 million at the end of 2020, when the patent still had six years to run. The patent is amortized by an equal amount every year. During 2021, ABC recorded the depreciation of existing equipment ($ 430 million) and buildings ($ 260 million). It also acquired a new piece of equipment. The acquisition price is $ 1,800 million, and the depreciation calculated for 2021 for that new piece of equipment is $ 180 million.

During 2021, ABC repaid all of its initial short-term debt, as well as its commercial paper.

Towards the end of 2021, ABC issued $ 500 million in commercial paper - a short-term loan that will be repaid during 2022. (Commercial paper is short-term negotiable debt issued by companies.) During 2022 ABC will also have to repay $ 800 million of its long-term debt on the 2020 balance sheet. During 2020 ABC has paid $ 300 million in interest on its various forms of debt. During 2021, ABC also borrowed $ 2,200 million long-term by selling bonds to investors. There will be no repayment on that debt in 2022.

During 2021, ABC has sold 8,000,000 widgets. Every widget is sold for $ 6,000 and has a direct cost of $ 4,500. The selling, general and administrative expenses for 2021 were $ 2,500 million. ABCs corporate income tax rate is 20%. We assume that the corporate income tax for 2021 is paid in 2021.

During 2021, ABC bought back (repurchased) 10 million shares, and paid an average price of $250 per share.

At the end of 2021, accounts receivable are $ 500 million higher than at the beginning of the year. The value of inventories is $ 2,500 million, while the value of accounts payable is $ 600 million at the end of 2021.

During 2021, ABC spent $700 million on a research and development project for a new and improved widget. The $700 3 million represented an immediate cash outflow from ABC, and it is expected to produce benefits for the firm in the short run. (In other words, we directly expense the R&D cost).

You have to write down ABCs balance sheet as of 31 December 2020 and 31 December 2021, as well as its income statement and statement of cash flows for 2021.

Find also the answers to the following questions:

What was ABCs net working capital at the end of 2020 and at the end of 2021? (Use both definitions.)

What was the change in net working capital during 2021?

What was ABCs EBIT (earnings before interest and tax) for 2021?

What was the book value of shareholders equity at the end of 2020? What was its book value at the end of 2021?

Suppose ABC is a listed company. The closing share price on 31 December 2021 was $ 320/share.

What is ABCs (equity) market-to-book ratio on that date?

What was ABCs (book) return on assets for 2021?

How about its (book) return on equity?

(Note: The end of 2020 is the same as the beginning of 2021.

Expert Answer

This solution was written by a subject matter expert. It's designed to help students like you learn core concepts.

Anonymous answered this686 answers

You have to write down ABCs balance sheet as of 31 December 2020 and 31 December 2021, as well as its income statement and statement of cash flows for 2021.

ABC
INCOME STATEMENT
For the year 2021
		Amount ($ Million)
Sales	$	48,000
Cost of goods		36,000
Gross Profit	$	12,000
Depreciation Expense		900
Selling and Administrative expenses		2,500
Research & Development Expenses		700
Net Operating Income	$	7,900
Interest Expense		300
Earnings before taxes	$	7,600
Taxes @20%		1,520
Net Income	$	6,080

ABC
Statement of Cash Flows for year 2021
Particulars	Amount ($ Million)	Amount ($ Million)
Net Income		6,080
Adjustment for Non-Cash and Non-Operating Expenses
Add:Depreciation	900
Add:Interest	300	1,200
Operating Cash flows before Working Capital Changes		7,280
Less:Increase in Accounts Receivable	- 500
Less:Increase in Inventory	- 1,100
Add:Increase in Accounts Payable	20	- 1,580
Net Cash Flows From Operating Activities		5,700
Cash Flows From Investing Activities
Addition to Plant & Equipment	- 1,800
Net Cash used in Investing Activities		- 1,800
Cash Flows From Financing Activities
Repayment of Short Term Debt	-1800
Redemption of Commercial Paper	-500
Proceeds from issue of Commercial Paper	500
Proceeds from issue long term bonds	2200
Repurchase of Stock	-2500
Repayment of Long Term Debt	- 800
Payment of Interest	- 300
Net Cash provided by Financing Activities		- 3,200
Summary
Net Increase in Cash and Cash Equivalents		700
Cash and Cash Equivalent at beginning of year 2020	1,200
Cash and Cash Equivalent at end of year 2020	1,900

ABC
BALANCE SHEET
For the year ended December 31,2021 & 2020
		2021	2020
Assets
Cash	$	1,900	1,200
Accounts Receivables		1,300	800
Inventory		2,500	1,400
Total current assets		5,700	3,400
Gross Fixed Assets
Land		4,500	4,500
Building		2,900	2,900
Equipment		4,600	2,800
Less:Accumulated Depreciation		2,070	1,200
Net Plant and equipment		9,930	9,000
Patent		150	180
Total Non-Current Assets		10,080	9,180
Total assets		15,780	12,580
Liabilities and Owners equity
Accounts Payables	$	600	580
Short Term Debt		500	2,300
Total current liabilities		1,100	2,880
Long-term debt		5,400	4,000
Total Liabilities		6,500	6,880
Common Stock		3,200	3,200
Retained Earnings		8,580	2,500
Less:Treasury Stock at cost		2,500	0
Shareholders equity		9,280	5,700
Total Liabilities and Shareholders equity		15,780	12,580

How did one find the long term debt in 2021 in the balance sheet, the depreciation expence in the income statement and is the increase in cash in 2021 from the cash flow or from the statement in the case?