FIN 3200 Chapter Notes - Chapter 2: Income Statement, Capital Structure, Current Liability

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limemule21

19 Sep 2016

School

Utah State University

Department

Finance

Course

FIN 3200

Professor

A L A N S T E P H E N S

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Document Summary

Balance sheet: financial statement showing a firm"s accounting value on a particular date. This is a convenient means of organizing and summarizing what a firm owns (its assets), what a firm owes (its liabilities), and the difference between the two (equity). Assets: the left side: fixed: fixed is one that has a long life. Can be tangible or intangible: current has a life of less than one year. Net working capital: current assets less current liabilities. Liquidity: refers to the speed and ease with which an asset can be converted to cash. Valuable, the more liquid a business is, the less likely it is to experience financial distress. The use of debt in a firms capital structure if called financial leverage. Generally accepted accounting principles: the common set of standards and procedures by which audited financial statements are prepared. Book values are not what the assets are generally worth.

Related Questions

Here is your first question:

Explain what current assets and fixed assets are and give as many examples as you can for each. What is the difference between tangible and intangible assets?

Liabilities and owner's equity are listed on the right-hand side respectively. Liabilities are also classified as current liabilities and long-term liabilities.

Here is your second question:

Explain what current liabilities differ from long-term liabilities and give as many examples as you can for each.

Owner's equity (also known as shareholders' equity, common equity) is the difference between total value of assets and total value of liabilities. That is, if you were to use your assets to pay off the debts, whatever is left over (the residual) would belong to shareholders. That is why they are known as residual claimants. Hence we have the identity;

Assets = Liabilities + Shareholders' equity

Net working capital is simply equal to current assets minus current liabilities. When net working capital is positive, it means cash that will be available over the next 12 months exceeds what must be paid. It is important for a healthy firm to have positive net working capital.

Here is your third question:

A firm has current assets of $100, net fixed assets of $500, short-term debt of $70 and long-term debt of $200. What is shareholders' equity. Construct a balance sheet

for this company. Is net working capital positive or negative? If so by how much? (Hint: You may utilize Example 2.1 on page 24 of the textbook).

The following is the financial statement of Executive Fruit Company for the year ended December 2014.

INCOME STATEMENT, 2014
(Figures in $ Thousands)
Revenue	$	5,500
Cost of goods sold		4,950

EBIT	$	550
Interest		110

Earnings before taxes	$	440
State and federal tax		176

Net income	$	264
Dividends		176

Additions to retained earnings	$	88

BALANCE SHEET (Year-End, 2014)
(Figures in $ Thousands)
Assets
Net working capital	$	550
Fixed assets		2,200

Total assets	$	2,750

Liabilities and shareholders' equity
Long-term debt	$	1,100
Shareholders' equity		1,650

Total liabilities and shareholders' equity	$	2,750

The following are the first stage and second stage pro forma financial statements of Executive Fruit Company for the year ended December 2015.

First stage pro forma statements:

PRO FORMA INCOME STATEMENT, 2015
(Figures in $ Thousands)
Revenue	$	6,050
Cost of goods sold		5,445

EBIT	$	605
Interest		110

Earnings before taxes	$	495
State and federal tax		198

Net income	$	297
Dividends		198

Additions to retained earnings	$	99

PRO FORMA BALANCE SHEET (Year-End, 2015)
(Figures in $ Thousands)
Assets
Net working capital	$	605
Fixed assets		2,420

Total assets	$	3,025

Liabilities and shareholders' equity
Long-term debt	$	1,100
Shareholders' equity		1,749

Total liabilities and shareholders' equity	$	2,849

Required external financing	$	176

Second stage pro forma balance sheet:

PRO FORMA BALANCE SHEET (Year-End, 2015)
(Figures in $ Thousands)
Assets
Net working capital	$	605
Fixed assets		2,420

Total assets	$	3,025

Liabilities and shareholders' equity
Long-term debt	$	1,276
Shareholders' equity		1,749

Total liabilities and shareholders' equity	$	3,025

How would Executive Fruitâs financial model change if the dividend payout ratio were cut to 1/3? Use the revised model to generate a new financial plan for 2015 assuming that debt is the balancing item. What would be the required external financing? (Do not round intermediate calculations.)

Dividends fall by $ . Therefore, the requirement for external financing falls from $ to $ . On the other hand, shareholders' equity will be increased by $ .

The right-hand side of the balance sheet becomes (Do not round intermediate calculations. Enter your answers in thousands.):


Long-term debt	$
Shareholders' equity

Total	$

The following is the financial statement of Executive Fruit Company for the year ended December 2014.

INCOME STATEMENT, 2014
(Figures in $ Thousands)
Revenue	$	4,000
Cost of goods sold		3,600

EBIT	$	400
Interest		80

Earnings before taxes	$	320
State and federal tax		128

Net income	$	192
Dividends		128

Additions to retained earnings	$	64

BALANCE SHEET (Year-End, 2014)
(Figures in $ Thousands)
Assets
Net working capital	$	400
Fixed assets		1,600

Total assets	$	2,000

Liabilities and shareholders' equity
Long-term debt	$	800
Shareholders' equity		1,200

Total liabilities and shareholders' equity	$	2,000

The following are the first stage and second stage pro forma financial statements of Executive Fruit Company for the year ended December 2015.

First stage pro forma statements:

PRO FORMA INCOME STATEMENT, 2015
(Figures in $ Thousands)
Revenue	$	4,400
Cost of goods sold		3,960

EBIT	$	440
Interest		80

Earnings before taxes	$	360
State and federal tax		144

Net income	$	216
Dividends		144

Additions to retained earnings	$	72

PRO FORMA BALANCE SHEET (Year-End, 2015)
(Figures in $ Thousands)
Assets
Net working capital	$	440
Fixed assets		1,760

Total assets	$	2,200

Liabilities and shareholders' equity
Long-term debt	$	800
Shareholders' equity		1,272

Total liabilities and shareholders' equity	$	2,072

Required external financing	$	128

Second stage pro forma balance sheet:

PRO FORMA BALANCE SHEET (Year-End, 2015)
(Figures in $ Thousands)
Assets
Net working capital	$	440
Fixed assets		1,760

Total assets	$	2,200

Liabilities and shareholders' equity
Long-term debt	$	928
Shareholders' equity		1,272

Total liabilities and shareholders' equity	$	2,200

Dividends fall by $ . Therefore, the requirement for external financing falls from $ to $ . On the other hand, shareholders' equity will be increased by $ .

The right-hand side of the balance sheet becomes (Do not round intermediate calculations. Enter your answers in thousands.):


Long-term debt	$
Shareholders' equity

Total	$

FIN 3200 Chapter Notes - Chapter 2: Income Statement, Capital Structure, Current Liability

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