Chapter 3

Question 1

*Depreciation = INFLOW

Depreciation won’t be counted when calculating cash flow. It will be completely excluded.
So to balance back, need to add depreciation. Thus, depreciation is an inflow.
P4 -6
a. Calculate the firm’s net operating profit after taxes (NOPAT) for the year ended
December 31, 2019, using Equation 4.1

Net operating profit after taxes (NOPAT) = EBIT x (1 – T)

= 2,700 x (1 – 0.21)
= RM 2,133

b. Calculate the firm’s net operating cash flow (OCF) for the year ended December 31,
2019, using Equation 4.3

Net operating cash flow (OCF) = NOPAT + Depreciation

= 2,133 + 1,600
= RM 3,733

c. Calculate the firm’s free cash flow (FCF) for the year ended December 31, 2019,
using Equation 4.4

Free cash flow (FCF) = OCF – NFAI – NCAI

= 3,733 – 1,400 – 1,400
= RM 933

*Net fixed asset investments (NFAI)

= Change in net fixed assets + Depreciation
= (14,800 - 15,000) + 1,600
= RM 1,400

*Net current asset investments (NCAI)

= Change in current assets - Change in (Acc Payables + Accruals)
= (8,200 - 6,800) - [(1,600 + 200) – (1,500 + 300)]
= RM 1,400

d. Interpret, compare and contrast your cash flow estimates in parts b and c.

 As for b, we can conclude that Keith Corporation’s operations are

generating a positive cash flow.

 As for c, we can conclude that the Operating Cash Flow (OCF) is sufficient to
cover all operating expenses of the company, net fixed asset investments as
well as net current asset investments. Therefore, a total of RM 933 is
available to pay the company’s creditors and equity holders.
 Question 2

a) Assuming that the firm has a cash balance of $32,000 at the beginning of January,
estimate the end-of-month closing cash balance for each month, March to August.

Projected Cash Receipts:

Jan Feb March Apr May June July August

600 500 600 500 700 800 750 800
Cash Sales 180 150 180 150 210 240 225 240
(0.30 x Sales)
*30% x 600
Collections of A/R 420 350 420 350 490 560 525
(After 1 month)
Other cash receipts - - 40 26 - 64 - -

*27 +
37

TOTAL CASH RECEIPTS RM 180 RM 570 RM 570 RM 596 RM 560 RM 794 RM 785 RM 765
 Projected Cash Disbursements:

Jan Feb March Apr May June July August

400 350 450 475 300 450 300 350

Cash Purchases 80 70 90 95 60 90 60 70
(0.20 x Purchases)
Payments of Acc 160 140 180 190 120 180 120
Payables
(0.40) *40% x *40% x *40% x *40% x *40% x *40% x
(After 1 month) 350 450 475 300 450 300

Payments of Acc 160 140 180 190 120 180

Payables
(0.40) *40% x *40% x *40% x *40% x *40% x *40% x
(After 2 months) 400 350 450 475 300 450

Wages & Salaries 150 125 150 125 175 200 187.5
payment
*0.25 x
*0.25 of sales in 600
preceding month
Rent payment 15 15 15 15 15 15 15 15

Fixed-asset payment 45

Tax payments 45

Dividend payments 26

TOTAL CASH RM 95 RM 395 RM 601 RM 580 RM 615 RM 590 RM 575 RM 572.50

DISBURSEMENTS

Cash Budget:

Jan Feb March Apr May June July August

Total cash 180 570 570 596 560 794 785 765
receipts
(-) Total cash (95) (395) (601) (580) (615) (590) (575) (572.50)
disbursements
NET CASH FLOW RM 85 RM 175 (RM 31) RM 16 (RM 55) RM 204 RM 210 RM 192.50
(+) Beginning 32 119 294 263 279 224 428 638
Cash Flow
ENDING CASH RM 117 RM 294 RM 263 RM 279 RM 224 RM 428 RM 638 RM 830.50
 b) The directors decide that the cash balance should be maintained at $20,000 at any
given point of time.

Determine the required total financing or excess cash balance for each month,
March to August.

Jan Feb March Apr May June July August

Total cash receipts 180 570 570 596 560 794 785 765
(-) Total cash (95) (395) (601) (580) (615) (590) (575) (572.50)
disbursements
NET CASH FLOW RM 85 RM 175 (RM 31) RM 16 (RM 55) RM 204 RM 210 RM 192.50
(+) Beginning Cash 32 119 294 263 279 224 428 638
Flow
ENDING CASH RM 117 RM 294 RM 263 RM 279 RM 224 RM 428 RM 638 RM 830.50
(-) Minimum cash (20) (20) (20) (20) (20) (20) (20) (20)
balance
 Required
total
financing
(notes
payable)
 Excess cash RM 97 RM 274 RM 243 RM 259 RM 204 RM 408 RM 618 RM 810.50
balance
(marketable
securities)
P4-16a

a. Compile the pro forma income statement for the year ended December 31, 2016 using the
percentage-of-sales-method
P-21A
STEP 1:

Percentage (%)

COGS/Sales:
(192,500 – 72,000) /350,000 = 0.31

Operating expenses/Sales:
(59,500 – 17,500) /350,000 = 0.12

STEP 2:

Morten Metal Limited

Pro Forma Income Statement
For the year ended Dec 31, 2020

$ $
Sales Revenue 420,000
(-) COGS
Fixed Cost 72,000
Variable Cost (0.34 x 420,000) 142,800 (214,800)
Gross Profits RM 205,200
(-) Operating expenses
Fixed Cost 17,500
Variable Cost (0.12 x 420,000) 57,400 (74,900)
Operating profits RM 130,300
(-) Interest expenses (18,000)
Net Profit Before Taxes RM 112,300
 (-) Taxes (25% x 112,300) (28,075)
Net Profit After Taxes RM 84,225
(-) Cash dividend (25% x 84,225) (21,056)
TO RETAINED EARNINGS RM 63,169

*Normally ignore Depreciation. (He mentioned in morning class – week 6)