Year Cost Depreciation Percentage Depreciation Amount

1 10,000 33% 3,300

2 10,000 45% 4,500
3 10,000 15% 1,500
4 10,000 7% 700
100% 10,000
Year Cost DepreciationDepreciation Amount
1 180,000 20% 36,000
2 180,000 32% 57,600
3 180,000 19% 34,200
4 180,000 12% 21,600
5 180,000 12% 21,600
6 180,000 5% 9,000
100% 180,000

a. OCF = NOPAT + Depreciation = EBIT x (1-T) + Depreciation

EBIT 336,800
NOPAT 202,080
OCF 236,280

b. Noncash items such as depreciation do not represent a real cash inflow or outflow.
Thus, we should exclude the effect of these items from cash flow.
Item Change Classificat Item Change Classification
Cash 100 O Accounts receivable -700 I
Accounts payable - 1,000 O Net profit 600 I
Notes payable 500 I Depreciation 100 N
Long-term debt - 2,000 O Repurchase of stock 600 O
Invenotry 200 O Cash dividends 800 O
Fixed assets 400 O Sale of Stock 1000 I
a. Metroline Manufacturing
Income Statement

2015 2016
Sales Revenue 1,400,000 1,500,000
Less: Cost of goods sold 910,000 975,000
Gross Profit 490,000 525,000
Less: operating expenses 120,000 128,571
Operating profit 370,000 396,429
Less: Interest expense 35,000 35,000
Net profits before taxes 335,000 361,429
Less: Taxes (rate = 40%) 134,000 144,571
Net profits after taxes 201,000 216,857
Less: Cash dividends 66,000 70,000
to retained earnings 135,000 146,857

b. Metroline Manufacturing
Breakdown of Costs and Expenses into fixed and variable components

2015 2016
Sales Revenue 1,400,000 1,500,000
Less: Cost of goods sold
Fixed cost 210,000 210,000
Variable cost 700,000 750,000
Gross Profit 490,000 540,000
Less: operating expenses
Fixed cost 36,000 36,000
Variable cost 84,000 78,400
Operating profit 370,000 425,600
Less: Interest expense 35,000 35,000
Net profits before taxes 335,000 390,600
Less: Taxes (rate = 40%) 134,000 156,240
Net profits after taxes 201,000 234,360
Less: Cash dividends 66,000 70,000
to retained earnings 135,000 164,360

c. As some costs are fixed, the percent-of-sales method does not provide a clear picture.
When sales revenue increases and we increase the cost by the same percent, that means that costs are overstated
and vice versa - if revenue decreases, we assume that all costs are variable and we understate costs and overstate p
Therefore, it is better to use fixed and variable cost data in order to precisely develop a pro forma income statemen
hat costs are overstated and profit is understated
ate costs and overstate profit.
forma income statement.
a.

b.

c.
 Leonard Industries Balance Sheet

2015 2016
Cash 45,000 50,000
Marketable securities 15,000 15,000
Accounts receivable 255,000 300,000
Inventories 340,000 360,000
Total current assets 655,000 725,000
Net fixed assets 600,000 658,000
Total assets 1,255,000 1,383,000

Accounts payable 395,000 420,000

Accruals 60,000 60,000
Other current liabiliti 30,000 30,000
Total current liabiliti 485,000 510,000
Long-term debt 350,000 350,000
Total liabilities 835,000 860,000
Common stock 200,000 200,000
Retained earnings 220,000 270,000
Total stockholders' eq 420,000 470,000
additional funds - 53,000
Totali liabilities and 1,255,000 1,383,000
Check - -

additional financing of USD53,000 is needed

Leonard Industries can reduce its 2016 dividend in order to retain funds within the company
and in that way, no additional funds will be necessary.