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b.
Operating Activities
Net Income $31,386
Investing Activities
Laiho Industries Income Statement
(in thousands of dollars)
2015
Statement of Stockholders' Equity
(in thousands of dollars)
Common
Stock
Retained
Earnings
Total
Stockholders'
Equity
36
Comprehensive/Spreadsheet Problem
Chapter 3: Financial Statements, Cash Flow, and Taxes
c.
d. An increase in the firm's dividend payout ratio would have no effect on its corporate taxes paid
e.
Net Operating Working Capital (must be financed by external sources)
NOWC14 = Current assets −(Current liabilities − Notes payable)
Tax rate 40.0%
Chapter 3: Financial Statements, Cash Flow, and Taxes
Integrated Case
37
Integrated Case
3-20
D’Leon Inc., Part I
Financial Statements and Taxes
Donna Jamison, a 2010 graduate of the University of Florida with 4 years of
banking experience, was recently brought in as assistant to the chairperson of
38
Integrated Case
Chapter 3: Financial Statements, Cash Flow, and Taxes
Jamison began by gathering the financial statements and other data given
Table IC 3.1. Balance Sheets
2015 2014
Assets
Liabilities and Equity
Accounts payable $ 524,160 $ 145,600
Chapter 3: Financial Statements, Cash Flow, and Taxes
Integrated Case
39
Table IC 3.2. Income Statements
2015 2014
Sales $ 6,034,000 $ 3,432,000
Note:
TABLE IC 3.3. Statement of Stockholders’ Equity, 2015
Total
Common Stock Retained Stockholders’
Shares Amount Earnings Equity
40
Integrated Case
Chapter 3: Financial Statements, Cash Flow, and Taxes
Table IC 3.4. Statement of Cash Flows, 2015
Operating Activities
Net income ($160,176)
Long-Term Investing Activities
Financing Activities
Increase in notes payable $436,808
A. What effect did the expansion have on sales, after-tax operating
income, net operating working capital (NOWC), and net income?
Answer: [S3-1 through S3-10 provide background information. Then show
Chapter 3: Financial Statements, Cash Flow, and Taxes
Integrated Case
41
B. What effect did the company’s expansion have on its free cash
flow?
Answer: [Show S3-15 here.]
FCF15 = [EBIT(1 – T) + Deprec.] – [Capital expenditures + NOWC]
42
Integrated Case
Chapter 3: Financial Statements, Cash Flow, and Taxes
C. D’Leon purchases materials on 30-day terms, meaning that it is
supposed to pay for purchases within 30 days of receipt. Judging
from its 2015 balance sheet, do you think that D’Leon pays
suppliers on time? Explain, including what problems might occur if
suppliers are not paid in a timely manner.
Answer: [Show S3-19 here.] D’Leon probably does not pay its suppliers on
time judging from the fact that its accounts payables balance
D. D’Leon spends money for labor, materials, and fixed assets
(depreciation) to make products—and spends still more money to
sell those products. Then the firm makes sales that result in
receivables, which eventually result in cash inflows. Does it appear
that D’Leon’s sales price exceeds its costs per unit sold? How does
this affect the cash balance?
Answer: [Show S3-20 here.] It does not appear the D’Leon’s sales price
Chapter 3: Financial Statements, Cash Flow, and Taxes
Integrated Case
43
E. Suppose D’Leon’s sales manager told the sales staff to start offering
60-day credit terms rather than the 30-day terms now being
offered. D’Leon’s competitors react by offering similar terms, so
sales remain constant. What effect would this have on the cash
account? How would the cash account be affected if sales doubled
as a result of the credit policy change?
Answer: [Show S3-21 here.] By extending the sales credit terms, it would
take longer for D’Leon to receive its money—its cash account would
F. Can you imagine a situation in which the sales price exceeds the
cost of producing and selling a unit of output, yet a dramatic
increase in sales volume causes the cash balance to decline?
Explain.
G. Did D’Leon finance its expansion program with internally generated
funds (additions to retained earnings plus depreciation) or with
external capital? How does the choice of financing affect the
company’s financial strength?
44
Integrated Case
Chapter 3: Financial Statements, Cash Flow, and Taxes
Answer: [Show S3-22 here.] D’Leon financed its expansion with external
H. Refer to Tables IC 3.2 and IC 3.4. Suppose D’Leon broke even in
2015 in the sense that sales revenues equaled total operating costs
plus interest charges. Would the asset expansion have caused the
company to experience a cash shortage that required it to raise
external capital? Explain.
I. If D’Leon starts depreciating fixed assets over 7 years rather than
10 years, would that affect (1) the physical stock of assets, (2) the
balance sheet account for fixed assets, (3) the company’s reported
net income, and (4) the company’s cash position? Assume that the
same depreciation method is used for stockholder reporting and for
tax calculations and that the accounting change has no effect on
assets’ physical lives.
Answer: [Show S3-24 here.] This would have no effect on the physical stock
Chapter 3: Financial Statements, Cash Flow, and Taxes
Integrated Case
45
J. Explain how earnings per share, dividends per share, and book
value per share are calculated and what they mean. Why does the
market price per share not equal the book value per share?
Answer: Net income divided by shares outstanding equals earnings per
K. Explain briefly the tax treatment of (1) interest and dividends paid,
(2) interest earned and dividends received, (3) capital gains, and
(4) tax loss carry-backs and carry-forwards. How might each of
these items affect D’Leon’s taxes?
Answer: [Show S3-25 through S3-30 here.] For a business, interest paid is
46
Integrated Case
Chapter 3: Financial Statements, Cash Flow, and Taxes
