Exercises - Correction

Financial statements - Correction
Exercise 1:
The Balance Sheet of W. company

Capital-employed balance sheet - 2016
Uses of funds Sources of funds
Net fixed assets 8,844 Equity 12,935
Inventories 8,405 Debt to bank 1,213

+Receivables 6,410 -Cash and eq. 12
-Payables (9,523) =Net debt 1,201
=NOWC =5,292
Operating capital 14,136 Operating capital 14,136
Solvency and liquidity analysis - 2016

Assets Liabilities+Equity
Net fixed assets 8,844 Equity 12,935
Inventories 8,405 Debt to bank 1,213

Receivables 6,410 +Accounts Payables 9,523
Cash and eq. 12 =Total liabilities =10,736
Total assets 23,671 Total liab+equity 23,671
The income statement of W. company

2016 2017
Sales 13,410 19,780
-Cost of sales (7,542) (12,540)
-Operating cost (3,540) (6,800)
=Operating income 2,328 440
+Financial income 450 300
-Interests paid (financial expense) (530) (350)
=Income before income tax and 2,248 390
exceptional items
-Exceptional loss* (120) 0
=Pretax income** 2,128 390
-Tax (32%) (681) (129)
=Net income 1,447 261
*Sales of assets
Assets sale price 80 **Tax=2,128*32%=681
Assets Net book value -120
Loss from sale of asset -40
Exceptional fine -80
Total except loss -120
2. Net income is decreasing due to higher costs of sales (+66%) and higher operating costs
(+92%) that do not compensate for higher sales (+47%).
1
3. Gross margin 2016: Sales-Cost of sales=13,410-7,542=5,868
Gross margin 2017: 19,780-12,540=7,240
Change in net working capital of W. company
Change in NWC between 2016 and 2017:

 in inventories + in receivables- in payables =  in NOWC
1,000+4,450-1,200=4,250
Cash used by operational activities is > than cash provided by op. activities.
The cash flow statement of W. company

2016 2017
Net income 1,447 261
+D&A 705 850
- Gains / + losses 40 0
= net cash flow (1) 2192 1,111
Change in inventories NC 1,000
+ change in receivables NC 4,450
- Change in payables NC 1,200
= Net change in NOWC (2) 792* 4,250**
Operational Cash flow (1)-(2)=(3) 1,400 (3139)
+ Sale of asset 80 0
= net investing flow (4) 80 0
Free Cash Flow (3)+(4) 1,480 (3,139)
- dividends 520 420
= Net change in cash 960 -3,559
* NOWC2016-NOWC2015=5,292-4,500=792
**Computed in the previous exercise
Exercise 2:
Operational cash flow: 451

Investment: -1670+400=-1270
1. FCF= Operating CF + Investing CF=451-1270=-819
2. a. Financial CF= 1,945-250=1,695
Net increase in cash: 1,695-819=876
b. Financial cash flow=500-50=450
Net increase in cash: 450-819=-369
Exercise 3:
1. Negative
Prepaid Insurance is a current asset. An increase in any asset account balance (other
than Cash) is assumed to have used Cash or decreased Cash. Both of these are considered to
have a negative effect on Cash.
2
[Because Prepaid Insurance is a current asset, the decrease in Cash appears in the
operating activities section of the statement of cash flows.]
2. Positive
Equipment is a long-term asset. A decrease in any asset account (other than Cash) is
assumed to be a source of Cash, provided Cash, or increased Cash. All of these
are positive effects on Cash.
[The entire proceeds from the sale of the equipment will be shown in the investing activities
section of the statement of cash flows.]
3. Positive
The Loss on the Sale of Equipment caused a decrease to the net income amount on the
income statement. However, there was no decrease in Cash for this loss. Therefore, we need
to add back (show an increase) to the net income amount appearing in the operating activities
section
4. Positive
Income Taxes Payable is a current liability. An increase in any liability account (or in
stockholders' equity) is assumed to increase Cash or at least be favorable from a Cash point
of view. If Income Taxes Payable increased, the company did not pay the entire amount
of Income Tax Expense shown on the income statement. Since the starting point in
the operating activities section is net income, you add back the increase in Income Taxes
Payable.
5. Negative
Accounts Receivable is a current asset. An increase in any asset (other than Cash) is
assumed to have a negative effect on Cash. The change in Cash is the OPPOSITE sign of the
change in the other ASSET'S balance.
[Because Accounts Receivable is a current asset, the change appears in the operating
activities section.]
6. Positive
The change in Cash will be the SAME direction as the change in the balance of a
LIABILITY account. In this case the Warranty Liability balance increased, so the effect
on Cash shown on the statement of cash flows is also a positive amount.
[Because Warranty Liability is a current liability, the change will appear in the operating
activities section.]
7. Negative
Dividends do decrease the company's Cash, which is a negative effect on Cash.
[Because dividends affect a stockholders' equity account, dividends will be shown in
the financing activities section as a negative amount.]
3
8. Positive
The proceeds received by the company for the new stock being issued will increase the
company's Cash, a positive effect on Cash.
[Because the transaction involves stockholders' equity, the amount will appear in
the financing activities section of the statement of cash flows.]
9. Negative
The Gain on Sale of Equipment was an increase to the net income on the income statement.
On the statement of cash flows we need to subtract the gain from the net income so that only
the cash from operating activities appears in the operating activities section. This subtraction
or decrease will also prevent the double counting of the gain, since the entire proceeds from
the sale are reported in the investing activities section.

Exercises - Correction

Uploaded by

Copyright:

Available Formats

Exercises - Correction

Uploaded by

Document Information

Original Description:

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Exercises - Correction

Uploaded by

Copyright:

Available Formats

Financial statements - Correction

The Balance Sheet of W. company

Inventories 8,405 Debt to bank 1,213

Solvency and liquidity analysis - 2016

Inventories 8,405 Debt to bank 1,213

Total assets 23,671 Total liab+equity 23,671

The income statement of W. company

Change in net working capital of W. company

Change in NWC between 2016 and 2017:

The cash flow statement of W. company

Operational cash flow: 451

You might also like