FNCE2003 Lecture Notes - Lecture 2: Cash Flow
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INSTRUCTION: Answer all questions in this section. Each question carries 2 marks. Answer True or False to the following questions.
1. The cash conversion cycle of a firm is the length of time between the actual cash outflow for materials and the actual cash inflow from sales. To calculate this cycle, we need all the information used to calculate the operating cycle plus Days Payables Outstanding (DPO).
2. Net working capital is defined as current liabilities minus current assets.
3. Sales volume and collection period will be affected by a firm's credit policy.
4. Accounts payable, or trade credit, increases net working capital.
5. Efficient cash management is often concerned with speeding up the collection of cheques received and slowing down the payment of cheques issued.
Choose the letter a, b, c, or d that carries the best response.
6. The income statement reports the results of operations during the past year, the most important item being:
Net Income
Interest Expense
Earnings Before Interest and Taxes
Earnings Per Share
7. Which would represent claims against assets in the balance sheet:
Liabilities
Liabilities and stockholders' equity
Common stockholders' equity
Both common and preferred stockholders' equity
8. The two accounts that normally make up the common equity section of the balance sheet are and
accounts payable; accruals
common stock; retained earnings
long-term bonds; common stock
equity; liabilities
9. Accounting profits is different from net cash flow because
Net cash flow includes profits from operations.
Non-cash items are not included in the accounting profits
Net-cash flows take account of all non-cash items
Accounting profits overlooks depreciation and taxes
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10. Which of the following represents an investing cash outflow?
An increase in holdings of stocks of other companies
A decrease in accounts payable
A decrease in gross property, plant and equipment
A decrease in accumulated depreciation
11. Which group of ratios show the combined effect of liquidity, asset management and debt on operating results?
Liquidity ratios
Debt ratios
Coverage ratios
Profitability ratios
12. Cottler Ltd. has current. assets equal to $4.5 million. The company's current ratio is 1.25, and its quick ratio is 0.75. What is the firm's level of current liabilities in millions | |
$3.6 | |
$0.18 | |
$2.4 | |
$2.9 |
13. You are given the following cash flows. What is the present value (t = 0) if the discount rate is 12 percent?
Time | 0 | 1 | 2 | 3 | 4 | 5 | 6 |
Cash flows | 0 | 1,000 | 2,000 | 2,000 | 2,000 | 0 | -2,000 |
PV= ? | |
$3,277 | |
$4,169 | |
$5,302 | |
$4,289 |
14. You invest $5,000 today. You will earn 8% interest. How much will you have in 4 years? (Pick the closest answer.)
$6,802 | |
$6,843 | |
$3,675 | |
$3,475 |
15. You are buying your first house for $220,000 and are paying $30,000 as a down payment. You have arranged a 30-year mortgage loan With a 7% nominal interest rate and monthly payments. What are the equal monthly payments you must make?
$1,513 | |
$1,464 | |
$1,264 | |
$6,922 |
I need help with this assignment and with filling in the blanks
ABC CORP
BALANCE SHEET
December 31, 2010
Cash $ 50
Marketable Securities 0
Accounts Receivables 1,000
Inventory 70
Fixed Assets ( net ) 2,000
Total Assets = 3,120
=====
Accounts Payable $ 1,170
Notes Payable 0
Retained earnings ?
Common Stock 1,400
Total of Both Liabilities & Equity =====
For the year ended 12/31/10 ABC CORP generated Sales of $6,000 and Net Income of $60. The net profit margin this year is considered normal by ABC CORP. Cost of Goods Sold was $4,200 in 2010. Cost of Goods Sold consistently averages seventy per cent of Sales, and will continue to do so in the future. Depreciation Expense was $500 in 2010. No Depreciation Expense was, or ever will, be included in Cost of Goods Sold. Fixed Operating Costs, excluding Depreciation Expense, were equal to $1,200 for 2010. These Fixed Operating Costs included all utilities, all insurance, all rent, all property taxes, and all labor charges. Fixed Operating Costs (other than depreciation expense) are paid for immediately, as they are incurred. Fixed Operating Costs were spread evenly throughout the year 2010. With regard to the size and timing of these costs, it is anticipated that the experience of 2010 will be repeated in 2011. Therefore, we anticipate cash payments associated with Fixed Operating Costs to equal $100 per month in 2011. Because of losses in recent years at ABC Corp and the loss carry forward provisions of the tax code there were no income taxes paid in 2010, and it is anticipated in 2011 that no income tax payments will be made.
Interest paid in 2010 was $40 and dividends paid in that same year were $60 Interest payments are made monthly and dividends are paid at the end of every quarter. The next dividend payment is scheduled for March 2011. The dividend payout ratio in 2010 is considered normal for ABC CORP. The annual interest rate for bank borrowing is six percent per year (one-half of one per cent per month). Interest paid in the current month is based on the previous monthâs balance in Notes Payable.
The target cash balance for the end of any current month is equal to ten percent of next monthâs sales.
Target ending inventory at the end of any current month is equal to twenty percent of estimated cost of goods sold for the next month. All purchases of inventory are paid for in the month following purchase. The entire balance of Accounts Payable, at any given point in time, represents the purchase of inventory which has not yet been paid for. One-half of all sales are collected in the month of sale, the remainder in the following Month. The sales forecast for the first four months of 2011 is
January $ 500
February 400
March 1,600
April 1,000
Sales for October, November and December of the year 2010 were $1,000 $1,000 and $2,000, respectively.
It is the policy of the company to repay bank borrowing as soon as possible; If money is not needed for this purpose, then investments of marketable securities are made. Marketable Securities should be liquidated to satisfy any subsequent need for cash flow before any new bank borrowing is done. The annual yield on marketable securities is three per cent (one-quarter of one percent per month). Interest payments to the firm are based on the previous monthâs balance in Marketable Securities.
On the next two pages, you will find a partially completed Cash Budget. Some numbers are filled in for your convenience. For only the month of January 2011, you are to fill in missing amounts in this Cash Budget. When you answer to this requirement remember to write zero if you mean zero because a blank will not be interpreted as zero.
The Cash Budget | |||
Nov 10 | Dec 10 | Jan 11 | |
Sales | 1,000 | 2,000 | 500 |
Cost of goods sold | 700 | 1400 | 350 |
Beginning Inventory | 140 | 280 | 70 |
Ending Inventory | 280 | 70 | 56 |
Purchases | 840 | 1,190 | 336 |
Cash Collections: | X | X | |
Collected in month of sale | X | X | |
Collected month after sale | X | X | |
Other Inflow: | X | X | |
Interest Income Payments | X | X | 0 |
TOTAL INFLOWS | X | X | |
Nov 10 | Dec 10 | Jan 11 | |
Outflows: | |||
Payment for Purchases | X | X | |
Interest Payments | X | X | 0 |
Overhead Payments | X | X | 100 |
Fixed Asset Additions | X | X | 0 |
Dividend payments | X | X | 0 |
Income Tax Payments | X | X | 0 |
TOTAL OUTFLOWS | X | X | |
Inflow - Outflow | X | X | |
Beginning Cash | X | X | |
Desired Cash | X | 50 | 40 |
Cash Produced Over + or Under - Immediate Need | X | X | |
Loan Required | X | X | |
Loan Repaid | X | X | |
Loan balance | X | 0 | |
Securities Purchased | X | X | |
Securities Sold | X | X | |
Securities Balance | X | 0 |
ABC CORP BALANCE SHEET
December 31, 2010
Cash $ 50
Marketable Securities 0
Accounts Receivables 2,000
Inventory 70
Fixed Assets ( net ) 2,000
Total Assets =====
Accounts Payable $ 2,340
Notes Payable 0
Retained earnings ?
Common Stock 1,400
Total of Both Liabilities & Equity =====
For the year ended 12/31/10 ABC CORP generated Sales of $12,000 and Net Income of $120. The net profit margin this year is considered normal by ABC CORP. Cost of Goods Sold was $8,400 in 2010. Cost of Goods Sold consistently averages seventy per cent of Sales, and will continue to do so in the future. Depreciation Expense was $500 in 2010. No Depreciation Expense was, or ever will, be included in Cost of Goods Sold.
Fixed Operating Costs, excluding Depreciation Expense, were equal to $1,200 for 2010. These Fixed Operating Costs included all utilities, all insurance, all rent, all property taxes, and all labor charges. Fixed Operating Costs (other than depreciation expense) are paid for immediately, as they are incurred. Fixed Operating Costs were spread evenly throughout the year 2010. With regard to the size and timing of these costs, it is anticipated that the experience of 2010 will be repeated in 2011. Therefore, we anticipate cash payments associated with Fixed Operating Costs to equal $100 per month in 2011. Because of losses in recent years at ABC Corp and the loss carry forward provisions of the tax code there were no income taxes paid in 2010, and it is anticipated in 2011 that no income tax payments will be made.
Interest paid in 2010 was $40 and dividends paid in that same year were $60 Interest payments are made monthly and dividends are paid at the end of every quarter. The next dividend payment is scheduled for March 2011. The dividend payout ratio in 2010 is considered normal for ABC CORP. The annual interest rate for bank borrowing is six percent per year (one-half of one per cent per month). Interest paid in the current month is based on the previous monthâs balance in Notes Payable. The target cash balance for the end of any current month is equal to ten percent of next monthâs sales. Target ending inventory at the end of any current month is equal to twenty percent of estimated cost of goods sold for the next month. All purchases of inventory are paid for in the month following purchase. The entire balance of Accounts Payable, at any given point in time, represents the purchase of inventory which has not yet been paid for. One-half of all sales are collected in the month of sale, the remainder in the following Month.
The sales forecast for the first four months of 2011 is
January $1,000
February 800
March 3,200
April 2,000
Sales for October, November and December of the year 2010 were $2,000 $2,000 and $4,000, respectively. It is the policy of the company to repay bank borrowing as soon as possible; If money is not needed for this purpose, then investments of marketable securities are made. Marketable Securities should be liquidated to satisfy any subsequent need for cash flow before any new bank borrowing is done. The annual yield on marketable securities is three per cent (one-quarter of one percent per month). Interest payments to the firm are based on the previous monthâs balance in Marketable Securities. On the next two pages, you will find a partially completed Cash Budget. Some numbers are filled in for your convenience. For only the month of January 2011, you are to fill in missing amounts in this Cash Budget. When you answer to this requirement remember to write zero if you mean zero because a blank will not be interpreted as zero. â
The Cash Budget | |||
Nov 10 | Dec 10 | Jan 11 | |
Sales | 1,000 | 2,000 | 500 |
Cost of goods sold | 700 | 1400 | 350 |
Beginning Inventory | 140 | 280 | 70 |
Ending Inventory | 280 | 70 | 56 |
Purchases | 840 | 1,190 | 336 |
Cash Collections: | X | X | X |
Collected in month of sale | X | X | |
Collected month after sale | X | X | |
Other Inflow: | X | X | |
Interest Income Payments | X | X | 0 |
TOTAL INFLOWS | X | X | |
Outflows: | X | X | X |
Payment for Purchases | X | X | |
Interest Payments | X | X | 0 |
Overhead Payments | X | X | 100 |
Fixed Asset Additions | X | X | 0 |
Dividend payments | X | X | 0 |
Income Tax Payments | X | X | 0 |
TOTAL OUTFLOWS | X | X | |
Inflow - Outflow | X | X | |
Beginning Cash | X | X | |
Desired (Ending) Cash | X | 50 | 80 |
Cash Produced Over + or Under - Immediate Need | X | X | |
Loan Required | X | X | |
Loan Repaid | X | X | |
Loan balance | X | 0 | |
Securities Purchased | X | X | |
Securities Sold | X | X | |
Securities Balance | X | 0 |