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FIN 310 Exam Two

Spring 2007

Name:_____________________________

Multiple Choice: Select the best answer. Circle the letter that corresponds to your
answer. Make sure to circle only one answer.
1.

Giventhefinancialmanagerspreferenceforfasterreceiptofcashflows,
(a) alongerdepreciablelifeispreferredtoashorterone.
(b) ashorterdepreciablelifeispreferredtoalongerone.
(c) themanagerisnotconcernedwithdepreciablelives,becausedepreciationisanoncash
expense.
(d) themanagerisnotconcernedwithdepreciablelives,becauseoncepurchased,
depreciationisconsideredasunkcost.

2.

UnderMACRS,anassetwhichoriginallycost$100,000,incurredinstallationcostsof
$10,000,andhasanestimatedsalvagevalueof$25,000,isbeingdepreciatedasa5year
classasset.Whatisthedepreciationexpenseinyear1?
(a) $15,000
(b) $12,750
(c) $11,250
(d) $22,000

($100,000 + $10,000) x 20% = $22,000


3.

Thecashflowsfromoperatingactivitiesofthefirminclude
(a) laborexpense.
(b) interestexpense.
(c) taxespaid.
(d) dividendspaid.

4.

AfirmhasactualsalesinNovemberof$1,000andprojectedsalesinDecemberand
Januaryof$3,000and$4,000,respectively.Thefirmmakes10percentofitssalesforcash,
collects40percentofitssalesonemonthfollowingthesale,andcollectsthebalancetwo
monthsfollowingthesale.ThefirmstotalexpectedcashreceiptsinJanuary
(a) are$700.
(b) are$2,100.
(c) are$1,900.
(d) cannotbedeterminedwiththeinformationprovided.

($1,000 x 50% + $3,000 x 40% + $4,000 x 10% = $2,100)

5.

Utilizingpastcostandexpenseratios(percentofsalesmethod)whenpreparingproforma
financialstatementswilltendto
(a) understateprofitswhensalesaredecreasingandoverstateprofitswhensalesare
increasing.
(b) understateprofits,nomatterwhatthechangeinsales,aslongasfixedcostsare
present.
(c) understateprofitswhensalesareincreasingandoverstateprofitswhensalesare
decreasing.
(d) overstateprofits,nomatterwhatthechangeinsales,aslongasfixedcostsarepresent.

6.

GiventhefinancialdataforNewElectronicWorld,Inc.(NEW),computethefreecash
flowfortheyearendedDecember31,2005
FortheyearendedDecember31,
2004
Depreciation
EBIT
InterestExpenses
Taxes
Cash
AccountsReceivable
Inventory
Netfixedassets
Accountspayable
Notespayable
Accruals

(a)
(b)
(c)
(d)

$21,000
39,000
27,000
22,000
25,000
50,000
1,000

2005
$3,000
30,000
3,000
8,000
24,000
45,000
30,000
24,000
30,000
40,000
2,000

$18,000
$12,000
$32,000
$14,000

OCF = EBIT - Taxes + Depreciation


OCF = $30,000 - $8,000 + $3,000 = $35,000
FCF = OCF - Net fixed asset investment (NFAI) - Net current asset investment
(NCAI)
NFAI = Change in net fixed assets + Depreciation
= (24,000 - 22,000) + 3,000 = $5,000
NCAI = Change in current assets - change in (Accounts payable + Accruals)
= (99,000 - 87,000) - (32,000 - 26,000)
= $6,000
FCF = 35,000 - 5,000 - 6,000 = $24,000
7.

Ruff Sandpaper Company has net income after taxes of $150 for 2006. Using the
information in Table 3.1 below, what is Ruffs Cash Provided by Operations on its
2006 Statement of Cash Flows?
(a) $50
(b) $150

(c) $350
(d) $450
Net Income
Add: Depreciation
Less: Increase in accounts receivable
Less: Increase in inventories
Add: Increase in accounts payable
Cash provided by operating activities

150
200
(200)
(200)
100
50

Table3.1
RuffSandpaperCo.
BalanceSheets
FortheYearsEnded2005and2006
2006
Assets
Cash
Marketablesecurities
Accountsreceivable
Inventories
Grossfixedassets
LessAccumulatedDepreciation
Netfixedassets
Totalassets
Liabilities
Accountspayable
Notespayable
Accruals
Longtermdebt
Stockholdersequity
Commonstockatpar
Paidincapitalinexcessofpar
Retainedearnings
Totalliabilitiesandequity

2005

800
200
1,200
2,000
3,000
1,000

600
200
1,000
1,800
2,800
800

2,000
6,200

2,000
5,600

200
800
100
2,000

100
900
100
1,500

500
2,000
600
6,200

500
2,000
500
5,600

Problems: You must show all of your work to receive credit.


1. Using the financial statements for IUP Enterprises and this additional information,
prepare a pro forma income statement and balance sheet for the year 2007 using the
percent of sales method. In the process, determine the external funds needed (EFN)
and assume that all adjustments for EFN are reflected in the common stock account.
Summarize your answers here:
Net Income 2007

3,990

Total Assets 2007

15,000

EFN 2007

-942

Sales for next year (2007) are expected to be $24,000. The firm is running efficiently and
at full capacity so that all assets and spontaneous liabilities are expected to increase
proportionally with sales. The dividend payout ratio for 2007 will be 20%.
IUP Enterprises
2006 Financial Statements
Income Statement ($)
Sales
Operating Expenses
EBIT
Interest Expense
EBT
Taxes (30%)
Net Income

16,000
12,000
4,000
200
3,800
1,140
2,660

Balance Sheet ($)


Current Assets
Property,Plant,&Equipment
Total Assets

4,000
6,000
10,000

Accounts Payable
Accruals
Long-term Debt
Common Stock
Retained Earnings
Total Liabilities and Equity

2,000
1,000
2,500
3,000
1,500
10,000

Working:
IUP Enterprises
Financial Statements
2006 % Sale
Sales
Operating Expenses
EBIT
Interest Expenses
EBT
Taxes (30%)
Net Income

16,000
12,000
4,000
200
3,800
1,140
2,660

100%
75%

4,000
6,000

25%
38%

1%
30%

2007
24,000
18,000 (24,000 x 75%)
6,000
300 (24,000 x 1%)
5,700
1,710 (5,700 x 30%)
3,990

Balance Sheet ($)


Current Assets
Property,Plant,&Equipment
Total Assets
Accounts Payable
Accruals
Long-term Debt
Common Stock
Retained Earnings
Total Liabilities and Equity

10,000
2,000
1,000
2,500
3,000
1,500
10,000

EFN

6,000 (24,000 x 25%)


9,000 (24,000 x 38%)
15,000

13%
6%
16%

3,000
1,500
3,750
3,000
4,692

(24,000 x 13%)
(24,000 x 6%)
(24,000 x 16%)
(1,500 + 3,192)

15,942
-942 (15,000 - 15,942)

Addition to retained earnings:


Net Income
Less: Dividend

3,990
(798)

Addition to retained earnings

3,192

2.

ThefinancialanalystforSportif,Inc.hascompiledsalesandpurchasesestimatesforthe
comingmonthsofJanuarythroughMayasshowninTable3.2below.Historically,75
percentofsalesareforcashwiththeremaining25percentcollectedinthefollowing
month.Purchasesaretypicallypaid70%inthemonthofpurchaseand30%inthe
followingmonth.TheendingcashbalanceinJanuaryis$3,000.Thecompanywantsto
maintainaminimumcashbalanceof$4,000.Prepareacashbudgetforthemonthsof
FebruaryandMarch,notinganyneededfinancingorexcesscashneeded.
Table3.2
Month
January
February
March
April
May

Sportif,Inc.
Sales
$5,000
6,000
10,000
10,000
10,000

Purchases
$6,000
$7,000
$4,000
$5,000
$5,000

Solution:

Opening cash balance

Feb
$3,000

Mar

Add: Cash Receipts


From January Sale
From February Sale
From March Sale

$1,600
$4,500

$3,100
$1,500
$7,500

Total Cash Inflow

$6,100

$12,100

Total Available Cash

$9,100

$12,100

Less: Cash Payments


From January Purchase
From February Purchase
From March Purchase

$1,800
$4,200

Total Payments

$6,000

$4,600

Ending Cash balance

$3,100

$7,500

$1,800
$2,800

(25% x $5,000)
(75% x $6,000) & (25% x $6,000)
(75% x $10,000)

(30% x $6,000)
(70% x $7,000 & 30% x $7,000)
(70% x $4,000)