a. Calculate the firm\'s accounting cash flow from operations for the year ended

Question

a. Calculate the firm's accounting cash flow from operations for the year ended December 31, 2009, Keith Corporation Balance sheets December 31 Assets 2009 2008 Cash 1500 1000 Marketable securities 1800 1200 Accounts receivable 2000 1800 Inventories 2900 2800 Total current assets $8200 $6800 Gross fixed assets $29500 $28100 Less Accumulated Depreciation $14,700 $13,100 Net fixed assets $14,800 $15,000 Total assets $23,000 $21,800 Liabilities and Stockholder's Equity Accounts payable $1,600 $1,500 Notes payable $2,800 $2,200 Accruals 200 300 Total current liabilities $4,600 4,000 Long-term debt $5,000 $5,000 Common stock $10,000 $10,000 Retained earnings $3,400 $2,800 Total stockholder's equity $13,400 $12,800 Total liabilities and stockholder's equity $23,000 $21,800 Income Statement Data (2009) Depreciation expense $1600 Earnings before interest and taxes $2,700 Interest expense $367 Net profits after taxes $1,400 Tax rate 40%

Explanation / Answer

MACRS depreciation expense and accounting cash flow Pavlovich Instruments, Inc., a maker of precision telescopes, expects to report pre-tax income of $430,000 this year. The company's financial manager is considering the timing of a purchase of new computerized lens grinders. The grinders will have an installed cost of $80,000 and a cost recovery period of 5 years. They will be depreciated using the MACRS schedule. a. If the firm reduces its reported income by the amount of the depreciation expense calculated below, what tax savings will result? b. Assuming that Pavlovich does purchase the grinders this year and that they are its only depreciable asset, find the firm's cash flow from operations for the year. Calculated depreciation expense Year Cost Percentages Depreciation 1 $80,000 20% $16,000 2 $80,000 32 $25,600 3 $80,000 19 $15,200 4 $80,000 12 $9,600 5 $80,000 12 $9,600 6 $80,000 5 $4000 Finding operating and free cash flows Consider the balance sheets and selected data from the income statement of Keith Corporation that can be found below, then prepare answers for the following questions: a. Calculate the firm's accounting cash flow from operations for the year ended December 31, 2009, b. Calculate the firm's net operating profit after taxes (NOPAT) for the year ended December 31, 2009,. c. Calculate the firm's operating cash flow (OCF) for the year ended December 31, 2009, using Equation 3.3. d. Calculate the firm's free cash flow (FCF) for the year ended December 31, 2009, e. Interpret, compare, and contrast your cash flow estimates in parts a, c, and d. Keith Corporation Balance sheets December 31 Assets 2009 2008 Cash 1500 1000 Marketable securities 1800 1200 Accounts receivable 2000 1800 Inventories 2900 2800 Total current assets $8200 $6800 Gross fixed assets $29500 $28100 Less Accumulated Depreciation $14,700 $13,100 Net fixed assets $14,800 $15,000 Total assets $23,000 $21,800 Liabilities and Stockholder's Equity Accounts payable $1,600 $1,500 Notes payable $2,800 $2,200 Accruals 200 300 Total current liabilities $4,600 4,000 Long-term debt $5,000 $5,000 Common stock $10,000 $10,000 Retained earnings $3,400 $2,800 Total stockholder's equity $13,400 $12,800 Total liabilities and stockholder's equity $23,000 $21,800 Income Statement Data (2009) Depreciation expense $1600 Earnings before interest and taxes $2,700 Interest expense $367 Net profits after taxes $1,400 Tax rate 40% Cash budget - Basic Grenoble Enterprises had sales of $50,000 in March and $60,000 in April. Forecast sales for May, June, and July are $70,000, $80,000, and $100,000, respectively. The firm has a cash balance of $5,000 on May 1 and wishes to maintain a minimum cash balance of $5,000. Given the following data, prepare and interpret a cash budget for the months of May, June, and July. 1) The firm makes 20% of sales for cash, 60% are collected in the next month, and the remaining 20% are collected in the second month following sale. 2) The firm receives other income of $2,000 per month. 3) The firm's actual or expected purchases, all made for cash, are $50,000, $70,000, and $80,000 for the months of May through July, respectively. 4) Rent is $3,000 per month. 5) Wages and salaries are 10% of the previous month's sales. 6) Cash dividends of $3,000 will be paid in June. 7) Payment of principal and interest of $4,000 is due in June. 8) A cash purchase of equipment costing $6,000 is scheduled in July. 9) Taxes of $6,000 are due in June.

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