3-1 Solutions to Chapter 3 Accounting and Finance 1. Sophie's ...

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Chapter 03 - Accounting and Finance17. The calculations are presented in the following table. Sales occur in quarters 2 and 3, sothis is when the cost of goods sold is recognized. Therefore, net income is zero inquarters 1 and 4. In quarter 1, the production of the kits is treated as an investment ininventories. The level of inventories then falls as goods are sold in quarters 2 and 3.Accounts receivable in quarters 2 and 3 equal the sales in those quarters since it takes onequarter for receivables to be collected. Notice that cash flow in quarter 1 equals the costof producing the kits and that in quarters 3 and 4 cash flow equals cash received for thekits previously sold.a. Quarter 1 Quarter 2 Quarter 3 Quarter 4Sales $0 $550 $600 $ 0Cost of goods sold 0 500 500 0Net income $0 $ 50 $100 $ 0b., c.Inventories $1,000 $ 500 $ 0 $0Accounts receivable 0 550 600 0Net working capital $1,000 $1,050 $600 $0Cash flow $1,000 $0 $550 $600Cash flow = net income – change in net working capitalEst time: 11–1518. Cash flow = profits accounts receivable 10,000+ accounts payable + 5,000 inventory(2,000)Cash flow = profits 10,000 + 5,000 (2,000) = profits 3,000Therefore, cash flow is $3,000 less than profits. This corresponds to the increase of $3,000in net working capital.Est time: 06–103-6
Chapter 03 - Accounting and Finance19. a. If the firm paid income taxes of $2,000, and the average tax rate was 20%,then taxable income must have been: $2,000/0.20 = $10,000.Therefore: Net income = taxable income taxes = $8,000b.Revenues $ ??? Cost of goods sold 8,000 Administrative expenses 3,000 Depreciation expense 1,000 Interest expense 1,000Taxable income $10,000 [from part (a)]We conclude that revenues were $23,000.c.Revenues $23,000 Cost of goods sold 8,000 Administrative expenses 3,000 Depreciation expense 1,000EBIT $11,000Est time: 06–1020. a.Sales$14.00 million Cost of goods sold 8.00 Interest expense 1.00 Depreciation expense 2.00Taxable income 3.00 Taxes (35%) 1.05Net income$ 1.95 millionCash flow = net income + depreciation expense = $3.95 millionb. If depreciation expense were increased by $1 million, net income would bereduced by $0.65 million. Cash flow (= net income + depreciation) would beincreased by $0.65 million + $1 million = $0.35 million.Cash flow increases because depreciation expense is not a cash outflow, butincreasing the depreciation expense for tax purposes reduces taxes paid by$0.35 million.3-7
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3-1 Solutions to Chapter 3 Accounting and Finance 1. Sophie's ...

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