322
b.
SAMPSON COMPANY
Statement of Cash Flows
For Year Ended December 31, 2011
Cash flow from operating activities:
Cash flow from customers
$
138,000
($145,000 – $7,000)
Cash payments to suppliers
(123,000)
($108,000 – $10,000 + $13,000 – $5,000 + $17,000)
Cash outflow for other expenses
(6,000)
Tax payments
(12,000)
Net cash outflow from operating activities
$
(3,000)
Cash flows from investing activities:
Plant assets increase
(15,000)
Cash flows from financing activities:
Mortgage payable increase
$
11,000
Common stock increase
6,000
Dividends paid
(21,000)
Net cash outflow from financing activities
(4,000)
Net decrease in cash
$
(22,000)
c. All major segments of cash flows were negative. Net cash outflow from operating
323
PROBLEM 10-7
a. The usual guideline for the current ratio is two to one. Arrowbell Company had a
The short-term debt position appears to be very poor.
Computation of Ratios
Current Ratio
=
Current Assets
Current Liabilities
2011
2010
$1,755,303
=
0.85
$1,599,193
=
1.14
$2,075,291
$1,401,235
Acid-Test Ratio
=
Cash Equivalents & Net Receivables
& Marketable Securities
Current Liabilities
2011
2010
$250,480 + $760,950
=
0.49
$260,155 + $690,550
=
0.68
$2,075,291
$1,401,235
Cash Ratio
=
Cash Equivalents & Marketable Securities
Current Liabilities
2011
2010
$250,480
=
0.12
$260,155
=
0.19
$2,075,291
$1,401,235
Operating Cash Flow/Current
Maturities of Long-Term Debt
and Current Notes Payable
=
Operating Cash Flow
Current Maturities of Long-Term
Debt and Current Notes Payable
2011
2010
$429,491
=
46.93%
$177,658
=
32.29%
$915,180
$550,155
324
c. The debt ratio has increased in 2011 to 0.61 from 0.58 in 2010. The debt/equity
Not enough information is available to compute the times interest earned, but we
can estimate this to be between 2 and 3, based on the earnings and the debt. We
would like to see the times interest earned to be higher than this amount. The review
in poor condition.
Debt Ratio
=
Total Debt
Total Assets
2011
2010
$2,625,291
=
0.61
$2,176,894
=
0.58
$4,316,598
$3,776,711
Debt/Equity
=
Total Debt
Stockholders’ Equity
2011
2010
$2,625,291
=
1.55
$2,176,894
=
1.36
$1,691,307
$1,599,817
Debt to Tangible Net Worth
=
Total Liabilities
Shareholders’ Equity – Intangible Assets
2011
2010
$2,625,291
=
155.22%
$2,176,894
=
136.07%
$1,691,307 – 0
$1,599,817 – 0
Operating Cash Flow/Total Debt
=
Operating Cash Flow
Total Debt
2011
2010
$429,491
=
16.36%
$177,658
=
8.16%
$2,625,291
$2,176,894
325
d. A banker would be especially concerned about the short-term debt situation. This
could lead to bankruptcy, even though the firm is profitable. A banker would be
e. Management should consider the following or a combination of the following:
1. Discontinue the expansion program at this time and get the short-term debt
2. Issue additional stock to improve the short-term liquidity problem and the long-
term debt situation. Because of the poor record on profitability and the way that
PROBLEM 10-8
a. Bernett Company had a decrease in cash of $23,000, although net cash flow from
significant net cash used by investing activities.
b.
1.
Current Ratio:
Current assets:
Cash
$
5,000
Accounts receivable
92,000
Inventory
130,000
Prepaid expense
4,000
Total current assets
$
231,000
(A)
Current Liabilities:
Accounts payable
$
49,000
Income taxes payable
5,000
Accrued liabilities
6,000
Current bonds payable
10,000
Total current liabilities
$
70,000
(B)
(A)
$231,000
=
3.30
(B)
$70,000
326
2.
Acid-Test Ratio:
Cash
$
5,000
Accounts receivable
92,000
$
97,000
(A)
Total current liabilities
$
70,000
(B)
(A)
$97,000
=
1.39
(B)
$70,000
3. Operating Cash Flow/Current Maturities of Long-Term Debt and Current Notes
Payable:
Operating cash flow [from (a)]
$
21,000
(A)
Current maturities of long-term debt
and current notes payable
$
10,000
(B)
(A)
$21,000
=
2.10
(B)
$10,000
4. Cash Ratio:
Cash
$
5,000
(A)
Total current liabilities
$
70,000
(B)
(A)
$5,000
=
.0714%
(B)
$70,000
c.
1.
Times Interest Earned:
Income before taxes
$
99,000
Plus interest expense
11,000
$
110,000
(A)
Interest expense
$
11,000
(B)
(A)
$110,000
=
10 times per year
(B)
$11,000
327
2.
Debt Ratio:
Total Liabilities:
Accounts payable
$
49,000
Income taxes payable
5,000
Accrued liabilities
6,000
Bonds payable
175,000
Total liabilities
$
235,000
(A)
Total assets
$
411,000
(B)
(A)
$235,000
=
57.18%
(B)
$411,000
3.
Operating Cash Flow/Total Debt:
Operating cash flow [from (a)]
$
21,000
(A)
Total debt [from (c.2.)]
$
235,000
(B)
(A)
$21,000
=
8.94%
(B)
$235,000
d.
1.
Return on assets:
Net income
$
69,000
(A)
Average assets
[($219,000 + $411,000)/2]
$
315,000
(B)
(A)
$69,000
=
21.90%
(B)
$315,000
2.
Return on Common Equity:
Net income
$
69,000
(A)
Average common equity
[($96,000 + $50,000 + $106,000 + $70,000)/2]
$
161,000
(B)
(A)
$69,000
=
42.86%
(B)
$161,000
328
e.
Operating Cash Flow/Cash Dividends:
Operating cash flow [from (a)]
$
21,000
(A)
Cash dividends
$
49,000
(B)
(A)
$21,000
=
0.43
(B)
$49,000
ratio is approximately 7%.
and the debt ratio and cash flow/total debt are good.
on common equity are very high.
half the cash dividends.
j. Alternatives appear to be as follows:
cash to pay accounts payable.
2. Issue additional long-term debt.
3. Issue additional common stock.
329
PROBLEM 10-9
and decrease in inventory.
The substantial cash flows from operating activities were used for investing activities
and financing activities. Cash was particularly used for the financing activity of
paying dividends.
b.
1.
Current Ratio:
Current assets:
Cash
$
30,000
Accounts receivable, net
75,000
Inventory
90,000
Prepaid expense
3,000
$
198,000
(A)
Current Liabilities:
Accounts payable
$
25, 500
Income taxes payable
2,500
Accrued liabilities
5,000
Current portion of bonds payable
20,000
$
53,000
(B)
(A)
$198,000
= 3.74
to 1
(B)
$53,000
2.
Acid-Test Ratio:
Cash
$
30,000
Accounts receivable, net
75,000
$
105,000
(A)
Current liabilities
$
53,000
(B)
(A)
$105,000
=
1.98
(B)
$53,000
Payable:
Operating cash flow
$
51,000
(A)
Current maturities of long-term debt
and current notes payable
$
20,000
(B)
(A)
$51,000
=
2.55
(B)
$20,000
4. Cash Ratio:
Cash
$
30,000
(A)
Current liabilities
$
53,000
(B)
(A)
$30,000
=
0.57%
(B)
$53,000
c. 1. Times Interest Earned:
Income before taxes
$
34,000
Plus interest expense
8,000
(B)
$
42,000
(A)
(A)
$42,000
=
5.25 times per year
(B)
$8,000
2. Debt Ratio:
Total Liabilities:
Accounts payable
$
25,500
Income taxes payable
2,500
Accrued liabilities
5,000
Bonds payable
90,000
$
123,000
(A)
Total assets
$
253,000
(B)
(A)
$123,000
=
48.62%
(B)
$253,000
d. 1. Return on assets:
$20,000
=
$20,000
=
7.59%
($253,000 + $274,000)/2
$263,500
2. Return on Common Equity:
$20,000
($85,000 + $54,000 + $85,000 + $45,000)/2
331
g. Profitability is good.
substantial cash available.
PROBLEM 10-10
a.
THE LADIES STORE
Statement of Cash Flows
For the Year Ended December 31, 2011
Cash flow from operating activities:
Cash receipts from customers
$
150,000
Cash receipts from interest
$
5,000
Cash payments for merchandise
(110,000)
Cash payments for interest
(2,000)
Cash payments for income taxes
(15,000)
Net cash flow from operating activities
$
28,000
Cash flows from investing activities:
Cash outflow for purchase of truck
$
(20,000)
Cash outflow for purchase of investment
(80,000)
Cash outflow for purchase of equipment
(45,000)
Net outflow for investing activities
(145,000)
Cash flows from financing activities:
Cash inflow from sale of bonds
$
100,000
Cash inflow from issuance of note payable
40,000
Cash inflow from financing activities
140,000
Net increase in cash
$
23,000
was for investing activities.