Below are the financial statements that you are asked to prepare.

1.

The income statement for each year will look like this:

Sales
Cost of goods sold
Selling & administrative
Depreciation
EBIT
Interest
EBT
Taxes
Net income

Income statement
2009
$277,855
141,641
27,854
39,983
$68,377
8,702
$59,675
11,935
$47,740

2010
$338,688
178,839
36,355
45,192
$78,302
9,962
$68,340
13,668
$54,672

$23,870
23,870

$27,336
27,336

Dividends
Addition to retained earnings
2.

The balance sheet for each year will be:

Cash
Accounts receivable
Inventory
Current assets
Net fixed assets
Total assets

Balance sheet as of Dec. 31, 2009

$20,437
Accounts payable
14,482
Notes payable
30,475
Current liabilities
$65,394
Long-term debt
$176,400
Owners' equity
$241,794
Total liab. & equity

$36,120
16,464
$52,584
$89,040
$100,170
$241,794

In the first year, equity is not given. Therefore, we must calculate equity as a plug variable. Since
total liabilities & equity is equal to total assets, equity can be calculated as:
Equity = $241,794 89,040 52,854
Equity = $100,170

Cash
Accounts receivable
Inventory
Current assets
Net fixed assets
Total assets

Balance sheet as of Dec. 31, 2010

$30,880
Accounts payable
18,785
Notes payable
41,821
Current liabilities
$91,486
Long-term debt
$214,184
Owners' equity
$305,670
Total liab. & equity

$40,908
17,976
$58,884
$102,480
$144,306
$305,670

The owners equity for 2010 is the beginning of year owners equity, plus the addition to
retained earnings, plus the new equity, so:
Equity = $100,170 + 27,336 + 16,800
Equity = $144,306
3. Using the OCF equation:
OCF = EBIT + Depreciation Taxes
The OCF for each year is:
OCF2009 = $68,377 + 39,983 11,935
OCF2009 = $96,425
OCF2010 = $78,302 + 45,192 13,668
OCF2010 = $109,826
4. To calculate the cash flow from assets, we need to find the capital spending and change in net
working capital. The capital spending for the year was:
Capital spending
Ending net fixed assets
Beginning net fixed assets
+ Depreciation
Net capital spending

$214,184
176,400
45,192
$ 82,976

And the change in net working capital was:

Change in net working capital
Ending NWC
Beginning NWC
Change in NWC

$32,602
12,810
$19,792

So, the cash flow from assets was:

Cash flow from assets
Operating cash flow
Net capital spending
Change in NWC
Cash flow from assets

$109,826
82,976
19,792
$ 7,058

5. The cash flow to creditors was:

Cash flow to creditors
Interest paid
Net new borrowing
Cash flow to creditors

$9,962
13,440
$3,478

6. The cash flow to stockholders was:

Cash flow to stockholders
Dividends paid
Net new equity raised
Cash flow to stockholders

$27,336
16,800
$10,536

Answers to questions
1. The firm had positive earnings in an accounting sense (NI > 0) and had positive cash flow
from operations. The firm invested $19,792 in new net working capital and $82,976 in new
fixed assets. The firm gave $7,058 to its stakeholders. It raised $3,478 from bondholders, and
paid $10,536 to stockholders.
2. The expansion plans may be a little risky. The company does have a positive cash flow, but a
large portion of the operating cash flow is already going to capital spending. The company
has had to raise capital from creditors and stockholders for its current operations. So, the
expansion plans may be too aggressive at this time. On the other hand, companies do need
capital to grow. Before investing or loaning the company money, you would want to know
where the current capital spending is going, and why the company is spending so much in
this area already.