Activity 3 Part I - Preparation of Cash Flow Statement (using Indirect Method)

CFS Company has the following details for two-year period, 2019 and 2018:

CFS Company
Statement of Cash Flows
For the year ended Dec. 31, 2019

Cash Flows from Operating Activities

Net Income ₱238,000
Prepaid Expenses 50,000
Depreciation 60,000
Increase/Decrease in Receivables (260,000)
Increase/Decrease in Inventory (240,000)
Increase/Decrease in Payables 140,000
Net cash flows from operating activities ₱(12,000)
Cash Flows from Investing Activities
Purchase of PPE -₱530,000
Purchase of Additional Investment (20,000)
Net cash flows from investing activities (550,000)
Cash Flows from Financing Activities
Increase in Notes Payable ₱500,000
Issuance of Additional Stocks 300,000
Payment of Dividends (38,000)
Net cash flows from financing activities 762,000
Net change in Cash ₱200,000
Cash and Cash Equivalents - January 1, 2018 150,000
Cash and Cash Equivalents - December 31, 2019 ₱350,000
Part 2
3-1

BALANCE SHEET

The assets of Dallas & Associates consist entirely of current assets and net plant and equipment,
and the firm has no excess cash. The firm has total assets of $2.5 million and net plant and
equipment equals $2 million. It has notes payable of $150,000, longterm debt of $750,000, and
total common equity of $1.5 million. The firm does have accounts payable and accruals on its
balance sheet. The firm only finances with debt and common equity, so it has no preferred stock
on its balance sheet.

A. What is the company’s total debt?

Short-term debt + Long-term debt = Total debt
150,000 + 750,000 = 900,000
ANSWER: $ 900,000

B. What is the amount of total liabilities and equity that appears on the firm’s balance sheet?

Total debts + (Accounts Payable + Accruals) = Total Liabilities

900,000 + 100,000 = 1,000,000
Total Liabilities + Equity = Total Assets
1,000,000 + 1,500,000 = 2,500,000
ANSWER: $2,500,000

C. What is the balance of current assets on the firm’s balance sheet?

Total Assets – Net Plant and Equipment = Current Assets

2,500,000 – 2,000,000 = 500,000
ANSWER: $500,000

D. What is the balance of current liabilities on the firm’s balance sheet?

Short-term debts + Notes Payable = Current Liabilities

150,000 + 100,000 = 250,000
ANSWER: $250,000

E. What is the amount of accounts payable and accruals on its balance sheet? (Hint:
Consider this as a single line item on the firm’s balance sheet.)

(Accruals + Accounts Payable) + Notes payable = Current Liabilities

100,000 + 150,000 = 250,000
Accruals + Accounts Payable = Current Liabilities- Notes Payable
 100,000 = 250,000 - 150,000
ANSWER: $ 100,000
F. What is the firm’s net working capital?

Current Assets – Current Liabilities = Net Working Capital

500,000 – 250,000 = 250,000
ANSWER: $250,000

G. What is the firm’s net operating working capital?

Operating current assets - Operating current liabilities = Net operating working capital
(NOWC)
500,000 – 100,000 = 400,000
Current Assets – Excess Cash = Operating Assets
500,000 – 0 = 500,000
Current Liabilities – Notes Payable = Operating Liabilities
250,000 – 150,000 = 100,000
ANSWER: $400,000

H. What is the explanation for the difference in your answers to parts f and g?
ANSWER:
NOWC - NWC
$400,000 - $250,000 = $150,000
The difference of net operating working capital and the net working capital is 150,000.

3-5

MVA Harper Industries has $900 million of common equity on its balance sheet, its
stock price is $80 per share, and its market value added (MVA) is $50 million. How many
common shares are currently outstanding?

Book Value of Stockholders’ Equity (BV) = 900 million

Market Price per Share = 80 per share
Market Value Added (MVA) = 50 million
MVA + BV / Market Price = Number of Common Shares
50 + 900 / 80 = 11.875
ANSWER: $11.875 million
 3-7

EVA Barton Industries has operating income for the year of $3,500,000 and a 36% tax
rate. Its total invested capital is $20,000,000 and its after-tax percentage cost of capital is 8%.
What is the firm’s EVA?
EBIT (1- Tax Rate) – (total investment after tax percentage – Tax Percentage Cost of
Capital) = EBIT
3,500,000 (1 – 36%) – (20,000,000 x 8%) = EVA
2,240,000 – 1,600,000 = 640,000
ANSWER: $640,000

3-12

STATEMENT OF CASH FLOWS Hampton Industries had $39,000 in cash at year-end

2017 and $11,000 in cash at year-end 2018. The firm invested in property, plant, and equipment
totalling $210,000. Cash flow from financing activities totalled 1$120,000.
A. What was the cash flow from operating activities?

Cash Balance 2017 – Cash Balance 2018 = Changes in Cash

39,000 – 11,000 = 28,000
Cash flow from investing activities – Cash Flow from financing activities - Changes in Cash = Cash Flow from
operating activities
210,000 – 120,000 - 28,000 = 62,000
ANSWER: $62,000

B. If accruals increased by $15,000, receivables and inventories increased by

$50,000, and depreciation and amortization totalled $25,000, what was the firm’s
net income?

Operating Activities = 62,000

Accruals = 15,000
Receivable and Inventories = 50,000
Depreciation and Amortization = 25,000
Operating Activities – Increase in Accruals – Depreciation and Amortization + Increase in Inventories =
Net Income
 62,000 – 15,000 – 25,000 + 50,000 = 72,000
ANSWER: $72,000

3-14

FREE CASH FLOW Arlington Corporation’s financial statements (dollars and shares are in
millions) are provided here.

A. What was net operating working capital for 2017 and 2018? Assume that all cash
is excess cash; i.e., this cash is not needed for operating purposes.

ANSWER:
2017= $42,000
2018= $50,220
(Current Assets – Excess Cash) – (Current Liabilities – Notes Payable) = NOWC
2017
(71,000 – 14,000) – (20,050 – 5,050) = 42,000
(83,320 – 15,000) – (25,100 – 7,000) = 50,220

B. What was Arlington’s 2018 free cash flow?

EBIT (1 – tax rate) + Depreciation and Amortization - (Capital Expenditures=NOWC) = Free

Cash Flow
 44,000 (1 – 40%) + 6,000 – (8,000 + 8,220) = 16,180
ANSWER: $16,180

C. Construct Arlington’s 2018 statement of stockholders’ equity.

ANSWER:
Statement of Stockholders’ Equity
For the Year Ended December 31, 2018

Total Shareholders’ Equity, Jan. $40,000

Shares Issuance during the year 36,950
Total Investment $76,950
Net Income for the year 2018 23,190
Less: Dividends declared for the year 2018 (13, 920)
Total Shareholders’ Equity, Dec. 31,2018 $86,220

D. What was Arlington’s 2018 EVA? Assume that its after-tax cost of capital is 10%.

Notes Payable + Long-term Debt + Common Equity = Total Investing Capital of

2018
7,000 + 20,000 + 86,220 = 113,220
EBIT (1- tax rate) – Total Investment Capital After x Tax Percentage Cost of
Capital = EVA
44,000 (1 – 60%) – 113,220 (10%) = 15,078
ANSWER: $15,078

E. What was Arlington’s MVA at year-end 2018? Assume that its stock price at
December 31, 2018 was $25.

(Market Price per Share x Number of Common Share) – Book Value of Firm’s
Equity = MVA
25 (4,000) – 86,220 =13,780
ANSWER: $13,780
Instruction: Submit using an electronic format (MS Word, Excel or PDF) or write on a clean,
white bond paper and take a shot and send thru Messenger Submission due date: October 9,
2020 at 5pm