ACCT3013 Lecture Notes - Lecture 4: Income Statement, Net Profit, Tax Shield

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peachcoyote549

29 Jul 2018

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Dividends new share issues. (cid:1840)(cid:1857)(cid:1872) (cid:1832)(cid:1866)(cid:1853)(cid:1866)(cid:1855)(cid:1853)(cid:1864) (cid:1827)(cid:1871)(cid:1871)(cid:1857)(cid:1872)(cid:1871)=(cid:1832)(cid:1866)(cid:1853)(cid:1866)(cid:1855)(cid:1853)(cid:1864) (cid:1827)(cid:1871)(cid:1871)(cid:1857)(cid:1872)(cid:1871) (cid:1832)(cid:1866)(cid:1853)(cid:1866)(cid:1855)(cid:1853)(cid:1864) (cid:1838)(cid:1853)(cid:1854)(cid:1864)(cid:1872)(cid:1857)(cid:1871) Financing brings cash that is used to obtain operating assets. Any remaining cash balance should be channelled towards profitable investments that generate even more cash. Financial liabilities include notes payable + current portion of long-term debt + interest-bearing. Accounts payable + long-term loans + corporate bonds + redeemable preferred stock. Financing funds the acquisition of operating assets, including all current assets other than cash and. Equivalents + non-current property, plant and equipment + other non-current assets used in. Operating liabilities include current liabilities other than interest-bearing debt + other non- Interest bearing non-current liabilities used in operations (e. g. deferred income from receiving cash before providing a service). Nfa gi(cid:448)es the (cid:374)et positio(cid:374) of fi(cid:374)a(cid:374)(cid:272)i(cid:374)g that has resulted fro(cid:373) the fir(cid:373)"s tra(cid:374)sa(cid:272)tio(cid:374)s (cid:449)ith (cid:272)apital markets, i. e. how much net cash there is available for investment. Financing itself adds no value it is what you do with financing that matters.

Related Questions

Krogh Lumber's 2016 financial statements are shown here.

Krogh Lumber: Balance Sheet as of December 31, 2016 (Thousands of Dollars)
Cash	$1,800	Accounts payable	$7,200
Receivables	10,800	Notes payable	3,472
Inventories	12,600	Accrued liabilities	2,520
Total current assets	$25,200	Total current liabilities	$13,192
		Mortgage bonds	5,000
Net fixed assets	21,600	Common stock	2,000
		Retained earnings	26,608
Total assets	$46,800	Total liabilities and equity	$46,800

Now suppose 2017 sales increase by 25% over 2016 sales. Assume that Krogh cannot sell any fixed assets. All assets other than fixed assets will grow at the same rate as sales; however, after reviewing industry averages, the firm would like to reduce its operating costs/sales ratio to 82% and increase its total liabilities-to-assets ratio to 42%. The firm will maintain its 60% dividend payout ratio, and it currently has 1 million shares outstanding. The firm plans to raise 35% of its 2017 forecasted interest-bearing debt as notes payable, and it will issue bonds for the remainder. The firm forecasts that its before-tax cost of debt (which includes both short- and long-term debt) is 11.5%. Any stock issuances or repurchases will be made at the firm's current stock price of $40. Develop Krogh's projected financial statements. What are the balances of notes payable, bonds, common stock, and retained earnings? Round your answers to the nearest hundredth of thousand of dollars.

Krogh Lumber Pro Forma Balance Statement December 31, 2017 (Thousands of Dollars)

2016

2017

Cash

$1,800

Accounts receivable

10,800

Inventories

12,600

Fixed assets

21,600

Total assets

$46,800

Payables + accruals

$9,720

Short-term bank loans

3,472

Total current liabilities

$13,192

Long-term bonds

5,000

Total debt

$18,192

Common stock

2,000

Retained earnings

26,608

Total common equity

$28,608

Total liab. and equity

$46,800

Excess capacity

Krogh Lumber's 2016 financial statements are shown here.

Krogh Lumber: Balance Sheet as of December 31, 2016 (Thousands of Dollars)
Cash	$1,800	Accounts payable	$7,200
Receivables	10,800	Notes payable	3,472
Inventories	12,600	Accrued liabilities	2,520
Total current assets	$25,200	Total current liabilities	$13,192
		Mortgage bonds	5,000
Net fixed assets	21,600	Common stock	2,000
		Retained earnings	26,608
Total assets	$46,800	Total liabilities and equity	$46,800

Krogh Lumber: Income Statement for December 31, 2016 (Thousands of Dollars)
	Sales	$36,000
	Operating costs including depreciation	30,783
	Earnings before interest and taxes	$5,217
	Interest	1,017
	Earnings before taxes	$4,200
	Taxes (40%)	1,680
	Net income	$2,520
	Dividends (60%)	$1,512
	Addition to retained earnings	$1,008

Assume that the company was operating at full capacity in 2016 with regard to all items except fixed assets; fixed assets in 2016 were being utilized to only 61% of capacity. By what percentage could 2017 sales increase over 2016 sales without the need for an increase in fixed assets? Round your answer to two decimal places.
%

Now suppose 2017 sales increase by 20% over 2016 sales. Assume that Krogh cannot sell any fixed assets. All assets other than fixed assets will grow at the same rate as sales; however, after reviewing industry averages, the firm would like to reduce its operating costs/sales ratio to 84% and increase its total liabilities-to-assets ratio to 42%. The firm will maintain its 60% dividend payout ratio, and it currently has 1 million shares outstanding. The firm plans to raise 35% of its 2017 forecasted interest-bearing debt as notes payable, and it will issue bonds for the remainder. The firm forecasts that its before-tax cost of debt (which includes both short- and long-term debt) is 10%. Any stock issuances or repurchases will be made at the firm's current stock price of $40. Develop Krogh's projected financial statements. What are the balances of notes payable, bonds, common stock, and retained earnings? Round your answers to the nearest hundredth of thousand of dollars.

Krogh Lumber Pro Forma Income Statement December 31, 2017 (Thousands of Dollars)
	2016	2017
Sales	$36,000	$
Operating costs (includes depreciation)	30,783	$
EBIT	$5,217	$
Interest expense	1,017	$
EBT	$4,200	$
Taxes (40%)	1,680	$
Net Income	$2,520	$
Dividends	$1,512	$
Addition to RE	$1,008	$

Krogh Lumber Pro Forma Balance Statement December 31, 2017 (Thousands of Dollars)
	2016	2017
Cash	$1,800	$
Accounts receivable	10,800	$
Inventories	12,600	$
Fixed assets	21,600	$
Total assets	$46,800	$
Payables + accruals	$9,720	$
Short-term bank loans	3,472	$
Total current liabilities	$13,192	$
Long-term bonds	5,000	$
Total debt	$18,192	$
Common stock	2,000	$
Retained earnings	26,608	$
Total common equity	$28,608	$
Total liab. and equity	$46,800	$

scarletpug838

A fire destroyed your firmâs ending balance sheet and income statement after the year-end
but before the financial statements are released. However, you have been successful in obtaining the
numbers for the beginning balance sheet and the statement of cash flows, which are provided to you and
your team members in Excel format. Fields representing the missing balance sheet and income statement
are End of year2 in the Excel sheet

CONSOLIDATED BALANCE SHEETS (USD $)	End of year 2	End of year 1
In Thousands, unless otherwise specified	End of year 2	End of year 1
Current assets:
Cash and cash equivalents	ã	598
Receivables, net	ã	230
Inventories, net	ã	2309
Other current assets	ã	47
Total current assets	ã	3184
Property and equipment, net of accumulated depreciation	ã	1292
Assets held for sale	ã	1
Goodwill	ã	76
Intangible assets, net	ã	29
Other assets, net	ã	32
Assets, Total	ã	4614
Current liabilities:	ã	0
Current portion of long-term debt	ã	0
Accounts payable	ã	2030
Accrued expenses	ã	380
Other current liabilities	ã	150
Total current liabilities	ã	2560
Long-term debt	ã	604
Other long-term liabilities	ã	239
Commitments and Contingencies	ã	0
Stockholders Equity Attributable to Parent [Abstract]	ã	0
Preferred stock, nonvoting, $00001 par value	ã	0
Common stock, voting, $00001 par value	ã	0
Additional paid-in capital	ã	520
Treasury stock, at cost	ã	-27
Accumulated other comprehensive income (loss)	ã	3
Retained earnings	ã	715
Total stockholders equity	ã	1210
Liabilities and Stockholders Equity, Total	ã	4613


CONSOLIDATED STATEMENTS OF OPERATIONS (USD $)	12 Months Ended
In Thousands, except Per Share data, unless otherwise specified	Year 2
Net sales	ã
Cost of sales, including purchasing and warehousing costs	ã
Gross profit	ã
Selling, general and administrative expenses	ã
Operating income	ã
Interest expense	ã
Other income, net	ã
Total other, net	ã
Income before provision for income taxes	ã
Provision for income taxes	ã
Net income	ã


CONSOLIDATED STATEMENTS OF CASH FLOWS (USD $)	12 Months Ended
In Thousands, unless otherwise specified	Year 2
Cash flows from operating activities:
Net income	$392
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	208
Share-based compensation	13
Loss on property and equipment, net	1
Other	2
Provision for deferred income taxes	-2
Excess tax benefit from share-based compensation	-16
Increase Decrease in Operating Capital
Receivables, net	-32
Inventories, net	-204
Other assets	11
Accounts payable	113
Accrued expenses	63
Other liabilities	-4
Net cash provided by operating activities	545
Cash flows from investing activities:
Purchases of property and equipment	-196
Payments to Acquire Businesses, Gross	-186
Sale of certain assets of acquired business	19
Proceeds from sales of property and equipment	1
Net cash used in investing activities	-362
Cash flows from financing activities:
(Decrease) increase in bank overdrafts	-3
Decrease in financed vendor accounts payable	0
Issuance of senior unsecured notes	449
Payment of debt related costs	-9
Borrowings under credit facilities	0
Payments on credit facilities	0
Dividends paid	-18
Proceeds from the issuance of common stock, primarily exercise of stock options	4
Tax withholdings related to the exercise of stock appreciation rights	-22
Excess tax benefit from share-based compensation	16
Repurchase of common stock	-81
Contingent payment accrued on acquisitions	5
Other	-1
Net cash provided by (used in) financing activities	331
Net increase (decrease) in cash and cash equivalents	514
Cash and cash equivalents, beginning of period	598
Cash and cash equivalents, end of period	1,112
Supplemental cash flow information:
Interest paid	35
Income tax payments	219
Non-cash transactions:
Accrued purchases of property and equipment	21
Retirement of common stock	0
Contingent consideration accrued on acquisitions	0
Changes in other comprehensive income	1
Declared but unpaid cash dividends	$4

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ACCT3013 Lecture Notes - Lecture 4: Income Statement, Net Profit, Tax Shield

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