Answer Key

PROBLEM 1 (STATEMENT OF FINANCIAL POSITION)

The assets of Cain & Abel Associates consist entirely of current assets and net plant and
equipment. The firm has total assets of 2.5 million, and net plant and equipment of 2 million. It
has notes payable of 150,000, long-term debt of 750,000, and total common equity of 1.5
million. The firm does have accounts payable and accruals on its statement of financial position.
The firm only finances with debt and common equity, so it has no preferred stock on its
statement of financial position.

Required:

a. Total liabilities and equity

Total Assets= Total liabilities and equity
2.5 million=Total liabilities and equity

b. Balance of current assets

Total assets= Current Assets + Net Plant and Equipment
2.5 million=Current Assets + 2 million
Current Assets= 2.5 million- 2 million
Current Assets= 500,000

c. Amount of accounts payable and accruals

Assets= Liabilities + Equity
2.5 M= Liabilities + 1.5 M
Liabilities= 2.5 M- 1.5 M
Liabilities= 1M

Liabilities= Accounts Payables and Accruals + Notes Payable + Long-term debt

1 Million = Accounts Payable and Accruals + 150,000 + 750,000
Accounts Payable and Accruals= 1 Million- 150,000- 750,000
Accounts Payable and Accruals= 100,000

d. Balance of current liabilities

e. Net working capital
f. Net operating working capital

PROBLEM 2 (INCOME STATEMENT)

Good Shepherd Shop had sales of 700,000 in 2015 and cost of goods sold represented 70
percent of sales. Selling and administrative expenses were 12 percent of sales. Depreciation
expense was 10,000 and interest expense for the year was 8,000. The firm’s tax rate is 30
percent. Required: Compute earnings after taxes.

PROBLEM 3 (STATEMENT OF CASH FLOWS)

The following information is available for Abraham’s Jewelry and Gift Store:

Net Income---------------------------------------------5,000

Depreciation Expense---------------------------------2,500

Increase in deferred tax liabilities---------------------500

Decrease in cash---------------------------------------3,000

Increase in marketable securities--------------------1,000

Decrease in accounts receivable---------------------2,000

Increase in inventories--------------------------------9,000

Decrease in accounts payable------------------------5,000

Increase in accrued liabilities------------------------1,000

Increase in property and equipment---------------14,000

Increase in short-term notes payable--------------19,000

Decrease in long-term notes payable---------------4,000

Required:

a. Net cash flow from operating activities

b. Net cash flow from investing activities
c. Net cash flow from financing activities
d. Change in cash

PROBLEM 4 (FREE CASH FLOW)

You are considering an investment in Kingdom Corporation and want to evaluate the firm’s free
cash flow. From the income statement, you see that East Corporation earned an EBIT of 62
million, paid taxes of 17 million, and its depreciation expense was 5 million. Fixed assets
increased by 32 million from 2018 to 2019. The firm’s current assets increased by 20 million and
current liabilities increased by 12 million. Calculate Kingdom Corporation’s free cash flow for
2019

PROBLEM 5 (ECONOMIC VALUE ADDED)

The following year-end data pertain to Adam Corporation:

EBIT---------------------------800,000

Current assets---------------800,000

Non-current assets-------3,200,000

Current liabilities-----------400,000

Non-current liabilities---1,000,000

Income tax rate------------30%

Cost of capital--------------10%

Required: Compute for the Economic Value Added (EVA)

I. Assessment

Free Cash Flow (25 points)

A company has an EBIT of P30,000,000, depreciation of P5,000,000, and a 40% tax rate. It
needs to spend P10,000,000 on new fixed assets and P15,000,000 to increase its current assets. It
expects its accounts payable to increase by P2,000,000, its accruals to increase by P3,000,000,
and its notes payable to increase by P8,000,000. The firm’s current liabilities consist of only
accounts payable, accruals, and notes payable. What is the company’s free cash flow?
Rubrics for Grading:
CRITERIA POINTS
Complete solution with correct answer 25
Last two (2) major steps of the solution are incorrect 20
Half of the solution is correct 15
First two (2) major steps of the solution are correct 10
First major step of the solution is correct 5

References:
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AccountingTools. (2019). The Purpose of Financial Statements. Retrieved from
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financial-statements.html
Brigham, E. F. & Ehrhardt, M. C. (2008). Financial Management(theory and practice) (12th
ed.). Boston, MA: Cengage Learning. pp. 83-93
Brigham, E. F., & Houston, J. F. (2017). Fundamentals of Financial Management (Concise) (9e).
Boston, MA, Boston, United States of America: Cengage Learning.
Debitoor. (2019). Debitoor. Retrieved from Debitoor: https://debitoor.com/dictionary/opening-
balance
Melicher, R. W., & Norton, E. A. (2017). Introduction to Finance (Markets, Investments, and
Financial Management) (16th Edition). Hoboken, NJ, New Jersey, United States of
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YCharts. (2019). YCharts. Retrieved from YCharts: https://ycharts.com/glossary/terms/end_cash