Chapter 4: Preparing and Using Financial Statements
67
See spreadsheet calculations below.
F. If Castillo had a net cash burn from operating and investing activities in 2019 divide the
amount of burn by 12 to calculate an average monthly burn amount. If the 2020 monthly
cash burn continues at the 2019 rate, indicate how long in months it will be before the
firm runs out of cash if there are no changes in financing activities.
CASTILLO PRODUCTS COMPANY
Note: Because Retained Earnings increased by only $40,000 and Net
Parts A-D:
Statement of Cash Flows ($ Thousands)
2019
Cash from Operating Activities:
Net income
75
Depreciation
40
Increase in accounts receivable
Increase in inventories
Increase in accounts payable
30
Increase in accrued liabilities
20
Net from Operating Activities
–15
–80
Cash from Investing Activities:
Increase in gross fixed assets
–90
Net from Investing Activities
–90
Cash from Financing Activities:
Increase in bank loan
10
Increase in long-term debt
Cash dividends paid
–35
Net from Financing Activities
75
Total net cash increase (decrease)
–30
Cash at beginning of period
50
Total net cash increase (decrease)
–30
Cash at end of period
20
Part E:
Operating activities (-15) + Investing activities (-90) = -105 (annual net cash burn)
Part F:
Monthly burn rate = annual burn/12
months
7. [Variable Expenses and Survival Revenues Breakeven] The Castillo Products Company
described in Problem 6 had a very difficult operating year in 2018 resulting in a net loss of
Chapter 4: Preparing and Using Financial Statements
68
$65,000 on sales of $900,000. In 2019, sales jumped to $1,500,000 and a net profit after
taxes was earned. The firm’s income statements are below.
A. Calculate each income statement item for 2018 as a percent of the 2018 sales level.
Make the same calculations for 2019. Determine which cost or expense items varied
directly with sales for the two-year period?
See spreadsheet calculations below.
Chapter 4: Preparing and Using Financial Statements
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Chapter 4: Preparing and Using Financial Statements
70
8. [Statement of Cash Flows and Cash Burn or Build] Salza Technology Corporation increased its
sales from $375,000 in 2018 to $450,000 in year 2019 as is shown in the firm’s income
statements presented below. LeAnn Sands, chief executive officer (CEO) and founder of the
firm expressed concern that the cash account and the firm’s marketable securities declined
substantially between 2018 and 2019. Salza’s complete balance sheets are also shown below.
Ms. Sands is seeking your assistance in the preparation of a statement of cash flows for Salza
Technology.
A. Prepare a statement of cash flows for 2019 for the Salza Technology Corporation.
See spreadsheet calculations below.
Chapter 4: Preparing and Using Financial Statements
71
C. Use your calculations from Part A for cash flows from operating and investing
activities to indicate the extent to which Salza was building or burning cash in 2019.
See spreadsheet calculations below.
Chapter 4: Preparing and Using Financial Statements
72
9. [Survival Revenues Breakeven] LeAnn Sands wants to conduct operating breakeven analyses
of the Salza Technology Corporation for year 2019. Income statement information is shown
in Problem 8. For year 2019, the firm’s cost of goods sold is considered to be variable costs
10. [Survival Revenues Breakeven] LeAnn Sands has reason to believe that year 2020 will be a
replication of year 2019 except that cost of goods sold are expected to be 65 percent of the
estimated $450,000 in revenues. Other income statement relationships are expected to
MINI CASE: JEN AND LARRY’S FROZEN YOGURT COMPANY
In 2019, Jennifer (Jen) Liu and Larry Mestas founded Jen and Larry’s Frozen Yogurt Company,
which was based on the idea of applying the microbrew or microbatch strategy to the production
and sale of frozen yogurt. [The involved reader may recall that we first introduced this yogurt
venture in the problems section at the end of Chapter 2.] Jen and Larry began producing small
quantities of unique flavors and blends in limited editions. Revenues were $600,000 in 2019 and
were estimated at $1.2 million in 2020.
Chapter 4: Preparing and Using Financial Statements
73
Note: For analysis and reference purposes Jen and Larry’s Frozen Yogurt Company income
statements and answers for (A) through (J) are shown below in spreadsheet format which should
be referred to for answer details.
A. How many cups of frozen yogurt would have to be sold in order for the firm to reach its
projected revenues of $1.2 million?
$1,200,000/$3.00 per cup = 400,000 cups
C. Jen and Larry believe that under a worst-case scenario yogurt revenues would be at the
2019 level of $600,000 even after plans and expenditures were put in place to ramp up
revenues in year 2020. What would happen to the venture’s EBDAT?
See spreadsheet output for details.
EBDAT = -$80,000 – $15,000 = -$95,000
E. Calculate the EBDAT breakeven point for year 2020 in terms of survival revenues for Jen
and Larry’s Frozen Yogurt Company. How many cups of frozen yogurt would have to be
sold to reach EBDAT breakeven?
EBDAT breakeven: SR = [CFC/(1 – VCRR) =
$395,000/(1 – $600,000/$1,200,000) = $395,000/.500 = $790,000
Cups: $790,000/$3.00 = 263,333.33 cups
Chapter 4: Preparing and Using Financial Statements
74
2. SR= $395,000/(1 – .467) = $395,000/.533 = $741,088 (spreadsheet solution =
$740,625)
H. Now assume that due to competition, Jen and Larry must sell their Frozen Yogurt for
$2.80 per cup in year 2020. The cost of producing the yogurt is expected to remain at
$1.50 per cup and cash fixed costs are forecasted to be $395,000 ($180,000 in
administrative, $200,000 in marketing, and $15,000 in interest expenses). Depreciation
expenses and the tax rate are also expected to remain the same as projected in the initial
discussion of Jen and Larry’s venture. Calculate the EBDAT breakeven point in terms of
Chapter 4: Preparing and Using Financial Statements
75
APPENDIX A:
NOPAT Breakeven: Revenues Needed to Cover Total Operating Costs
DISCUSSION QUESTIONS AND ANSWERS
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1. Define the terms EVA and NOPAT and describe the meaning of NOPAT breakeven and NOPAT
breakeven revenues.
Economic Value Added is a measure of a firm’s economic profit over a certain period of time. The
2. Identify and explain the formula for finding the NOPAT breakeven revenues. Relate this to breakeven
in terms of EBIT.
NOPAT breakeven revenues are calculated by dividing the total operating fixed costs by one minus
EXERCISES/PROBLEMS
1. Refer to Problem 5 in the chapter involving the SubRay Corporation.
A. Estimate the NOPAT breakeven amount in terms of revenues necessary for the SubRay
Corporation to break even next year.
NOPAT breakeven revenues (NR) equals the amount of revenues needed to cover
total operating costs.
B. Assume that the product selling price is $50 per unit. Calculate the NOPAT breakeven
point in terms of the number of units that will have to be sold next year.
Chapter 4: Preparing and Using Financial Statements
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NOPAT revenues (NR) for a zero NOPAT from Part A = $350,000
$350,000/ $50 = 7,000 units
2. Refer to Problems 9 and 10 in the chapter involving the Salza Technology Corporation (see
Problem 8 for the firm’s financial statements).
A. Calculate Salza’s NOPAT breakeven in terms of NOPAT breakeven revenues for year
2019.
B. Calculate the NOPAT breakeven point for 2020 for Salza in terms of NOPAT breakeven
revenues.
3. Refer to the Mini Case at the end of the chapter involving Jen and Larry’s Frozen Yogurt
Company.
A. Calculate the dollar amount of NOPAT if Jen and Larry’s venture achieves her forecasted
$1.2 million in sales in year 2020. What would NOPAT be as a percent of sales?
NOPAT = EBIT(1 – tax rate) = $170,000(1 – .25) = $170,000(.75) = $127,500
B. Calculate the NOPAT breakeven point for year 2020 in terms of NOPAT breakeven
revenues for Jen and Larry’s venture. How many cups of frozen yogurt would have to be
sold to reach NOPAT breakeven?
NOPAT breakeven: NR = TOFC/(1 – VCRR) =