Nguyễn Phương Anh - 20070009

Question 2:
- The recognition and matching principles in financial accounting call for revenues, and the costs
associated with producing those revenues, to be "booked" when the revenue process is
essentially complete, not necessarily when the cash is collected or bills are paid. Generally
accepted accounting principles require the use of accrual accounting instead of cash basis
accounting. So, revenue and expense on the incone statement does not exactly line up with the
cash inflows and outflows for the period, particularly as it relates to transactions occurring at the
beginning or end of the period.
- Moreover, the Income Statement deals only with revenues and expenses. The Cash Flow
Statement includes any form of cash flow, be it revenues, expenses, the sale or purchase of
assets, payment or proceeds from liabilities, etc.
Question 4:
- Depreciation is a non-cash deduction that reflects adjustments made in asset book values in
accordance with the matching principle in financial accounting. Interest expense is a cash outlay,
but it's a financing cost, not an operating cost.
- Non-cash expenses, such as depreciation, amortization, and share-based compensation, must be
included in net income, but those costs do not reduce the amount of cash a company generates in
a given period. As a result, these expenses are added back into the cash flow statement.
Question 6:
- It's probably not a good sign for an established company, but it would be fairly ordinary for a
start-up, so it depends.
- When a company first opens its doors, negative cash flow is essential. Many businesses will
spend three or more years without turning a profit in their infancy. This allows them to pour the
resources needed into developing the brand through marketing and other efforts. Only after a
company has a client base can the cash inflow start to outweigh the cash outflow.
- There are periods in a business's ongoing operation when it will need to exhibit negative cash
flow. Expansion is one of those times. Employees will need raises, stock holders want dividend
growth, and these things only occur if a business expands through a short period of negative cash
flow.
- Seasonal businesses may also experience negative cash flow for a limited period of time. For
example, retail clothing stores will have negative cash flow during slow periods when they are
primarily purchasing merchandise.
Question 7:
- Negative cash flow is a problem when it cannot be justified through an expansion. If a business
has negative cash flow unexpectedly, this may be a sign of a more systemic problem. A business
with constant negative cash flow is losing money over time. This loss can result in unpaid bills
first. The next move a business will make in order to rectify the problem is a series of layoffs.
Only if the company can show it rectifies the problem immediately through a direct action will it
survive and begin to generate positive cash flow in the future.
Question 8:
- Yes, the company's change in NWC is negative in a given year. This might be possible if a
company had reduced investment in current assets as compared with the last year.
- For example, if a company were to become more efficient in inventory management, the
amount of inventory needed would decline. The same might be true if it becomes better at
collecting its receivables. In general, anything that leads to a decline in ending NWC relative to
beginning NWC would have this effect. Negative net capital spending would mean more long-
lived assets were liquidated than purchased.
Question 9:
- Yes, cash flow to stockholders can be negative only in a year in which companies issue new
stock and when the amount sold exceeds dividends and share repurchases. When companies sell
stock, cash moves from stockholders to the companies’ business. This is the only item that
negatively impacts the cash flow to stockholders formula. The other two transactions: dividends
and stock repurchases represent cash flowing from the business to stockholders, which positively
affects the formula.
- In certain instances, negative cash flow to stockholders is perfectly normal for a small business.
A company often has negative cash flow to stockholders in its first year of business because of
startup money contributed by owners. The cash flow measure also might be negative in
subsequent years if a rapidly growing business raises additional capital from investors to fund
expansion. If a business allocates the new capital wisely, it might generate higher future profits.
Problem 14:
To find the OCF, we first calculate net income.
Income Statement
Sales: 267,000
Subtract: Costs 148,000
Subtract: Other expenses 8,200
Subtract: Depreciation 17,600
=> Earnings before interest and taxes = EBIT = 93,200.
Subtract: Interest 12,400
Subtract: Taxes 32,620
=> Net income = 48,180
a.
OCF = EBIT + Depreciation - Taxes
OCF = 93,200 + 17,600 - 32,620
OCF = 78,180
b.
CFC = Interest - Net new LTD
CFC = 12,400 - (-4,900)
CFC = $17,300
(The net new long-term debt is negative because the company repaid part of its long-term debt).
c.
CFS = Dividends - Net new equity
CFS = 15,500 – 6,400
CFS = 9,100
d.
We know that CFA = CFC + CFS, so:
CFA = $17,300 + 9,100
CFA = $26,400
CFA = OCF - Net capital spending - Change in NWC.
Net capital spending = Increase in NFA + Depreciation
Net capital spending = $25,000 + 17,600
Net capital spending = $42,600
CFA = OCF - Net capital spending - Change in NWC
$26,400 = $78,180 - 42,600 - Change in NWC
Change in NWC = 9,180.
Problem 19: Nguyen Phuong Anh - 20070009
a. Income Statement
Sales: 675,000
Subtract: COGS 435,000
Subtract: Administrative and selling expenses 85,000
Subtract: Depreciation 125,000
=> Earnings before interest and taxes = EBIT = 30,000.
Subtract: Interest 70,000
=> Taxable income = -40000
Subtract: Taxes 0
=> Net income = -40,000
b. OCF = EBIT + Depreciation - Taxes
OCF = 30,000 + 125,000 = 155,000.
c.
- The net income of Incorporation R showing the result in a negative form because, of the
interest expense and tax deductibility of depreciation.
- The operating cash flow for Incorporation R showing the result in a positive form because,
non- cash expenses like depreciation expenses, arising out of financing assets like interest
expense are not included in the calculation of the operating cash flow.
Question 21:
a. Income Statement
Sales: 30,096
Subtract: COGS 21,476
Subtract: Depreciation 5,341
=> Earnings before interest and taxes = EBIT = 3,279
Subtract: Interest 2,409
=> Taxable income = 870
Subtract: Taxes 870x35%=304.5
=> Net income = 565.5
b. OCF = EBIT + Depreciation - Taxes
OCF = 3,279 + 5,341 – 304.5 = 8315.5.
c. Change in NWC = NWCend − NWCbeg
Change in NWC = (CAend − CLend) − (CAbeg − CLbeg)
Change in NWC = ($7,829 – 4,159) − (6,336 − 3,564)
Change in NWC = 898

Net capital spending = NFAend − NFAbeg + Depreciation

Net capital spending = 22,176 – 18,018 + 5,341
Net capital spending = 9,499

CFA = OCF − Change in NWC − Net capital spending

CFA = 8315.5 − 898 − 9499
CFA = −2081.5

The cash flow from assets can be positive or negative, since it represents whether the firm raised
funds or distributed funds on a net basis. In this problem, even though net income and OCF are
positive, the firm invested heavily in both fixed assets and net working capital.

d.
Cash flow to creditors = Interest - Net new LTD
Cash flow to creditors = 2,409 − 0
Cash flow to creditors = 2,409

Cash flow to stockholders = Cash flow from assets − Cash flow to creditors
Cash flow to stockholders = −2081.5 − 2,409
Cash flow to stockholders = −4490.5
Problem 22:
a.
Owner’s equity = Total assets – Total liabilities
2014 ( 4,144 + 1,005 ) – ( 2,190 + 402) = 2,557
2015 ( 4,990 + 1,089) – (2,329 + 415) = 3,299
b. Change in net working capital = Changes in current assets – Changes in current liabilities
= ( 1,098 – 1,005) – ( 451 - 402)
 = 35
c.
Cash flow from assets
Details Amount ($)
Sales 12,751
Less: Cost of goods sold 5,946
Less: Depreciation 1,136
EBIT 5,669
Less: Interest 323
EBT 5,346
Less: Tax 1871.1
Net income 3,474.9
Operating cash flow = EBIT + Depreciation – Taxes
= $4,933.9
Net capital spending = Net fixed assets at the year ending - Net fixed assets at the year beginning
+ Depreciation
= $4,990 - $4,144 + 1,136
= $1,982
Sale of fixed assets = Purchase – Net capital spending
= $2,080 - $1,982
= $98
Cash flow from assets = Operating cash flow – Net capital spending – Net working capital
= $2,916.9
d.
Cash flow to creditors = Interest expenses – Net new borrowings
= $323 – ($2,329 - $2,190)
= $184
Debt repaid = New debt issued – Cash flow to creditors
= $420 - $184
= $236