9. Analyzing accounting data for managerial decisions Accounting data is used to
ID: 2820607 • Letter: 9
Question
9. Analyzing accounting data for managerial decisions Accounting data is used to generatea firm's financial statements, but a firm's intrinsic value is based on its free cash flows, which are the cash flows available for distribution to the company's investors after the company has made al of the investments necessary to sustain its ongoing operations. Consider the following case: J&H Corp. recently hired Jeffery. His immediate mandate was to analyze the company. He has to submit a report on the company's operational efficdency and estimate its potential investment in working capital. He has the income statement from last year and the following information from the company's financial reports as well as some industry averages. Last year, J&H Corp. reported a book value of $300,000 in cument assets, of which 15% is cash, 17% is short-term investments, and the rest is accounts receivable and inventory . The company reported $255,000 of current liabilities including accounts payable and accruals. Interestingly, the company had no notes payable outstanding, and there were no changes in the company's accounts payable during the year . The company, however, invested heavily in plant and equipment to support its operations. It reported a book value of $4BD,000 for its long-term assets last year Income Statement For the Year Ended on December 31 Industry Average J&H Corp. Net sales $25,000,000 $31,250,000 25,000,000 1,250,000 26,250,000 $5,000,000 750,000 $4,250,000 1,70D,000 $2,550,00o Operating costs, except depreciation and amortization Depreciation and amortization Total operating costs Operating income (or EBIT) Less: Interest expense Earnings before taxes (EBT) Less: Taxes (40%) Net income 20,DD0,000 1,0DD,000 21,000,000 $4,000,000 400,000 $3,600,000 1,440,000 $2,160,000 Based on the information given to him, Jeffery submits a report on January 1 with some important calculations for management to use, both for analysis and to devise an action plan. Complebe the following statements in his report. Statement #1: J&H Corp.'s NOPAT S , which is less than the industry average of Statement #2: The company has no notes payable reported in its balance sheet, so its current operating abilities total Statement #3: The attributable to its annual difference between J&H's Corp's net income and its net cash flow is Statement #4: J&H Corp.'s total net operating capital of consists of the sum of its and its total investment inExplanation / Answer
Statement 1
The Net operating Profit after taxes (NOPAT) for J&H is Operating profit after taxes i.e. 4,000,000 (1-0.40) = $2,400,000.
The Industry average of NOPAT is 5,000,000 (1-0.40) = $3,000,000.
Statement 2
The current operating liabilities of company is $255,000
Statement 3
Net cash flow attributable to company's shareholder = 2,160,000 + 1,000,000 = $3,160,000.
Difference between net cash flow and net income = 3,160,000-2,160,000 = 1,000,000
This difference is attributable to its annual depreciation.
Statement 4
Net operating capital of capital of a company is Investment in working capital + Investment in fixed capital i.e. 300,000-255,000+480,000 = $525,000.
J&h Corp's total net operating capital of 525,000 consists of the sum of its Working capital and its total investment in Fixed asset i.e. plant and equipment.
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.