Consider the following abbreviated financial statements for Parrothead Enterprises:

Consider the following abbreviated financial statements for Parrothead Enterprises:

  

PARROTHEAD ENTERPRISES 2010 and 2011 Partial Balance Sheets
Assets								Liabilities and Owners’ Equity
		2010			2011					2010			2011
Current assets	$	934		$	984			Current liabilities	$	375		$	398
Net fixed assets		3,897			4,576			Long-term debt		2,021			2,167

 

PARROTHEAD ENTERPRISES 2011 Income Statement
Sales	$	11,770
Costs		5,710
Depreciation		1,060
Interest paid		180

 

a.	What is owners' equity for 2010 and 2011?

 

Owners' equity 2010	$
Owners' equity 2011	$

b.	What is the change in net working capital for 2011?

 

Change in NWC

$

 

c-1	In 2011, Parrothead Enterprises purchased $1,845 in new fixed assets. How much in fixed assets did Parrothead Enterprises sell?

 

Fixed assets sold

$

c-2	In 2011, Parrothead Enterprises purchased $1,845 in new fixed assets. What is the cash flow from assets for the year? (The tax rate is 35 percent.)

 

Cash flow from assets

$

 


Explanation:

a.

Total assets 2010	=	$934 + 3,897 = $4,831
Total liabilities 2010	=	$375 + 2,021= $2,396
Owners’ equity 2010	=	$4,831 – 2,396 = $2,435

Total assets 2011	=	$984 + 4,576 = $5,560
Total liabilities 2011	=	$398 + 2,167 = $2,565
Owners’ equity 2011	=	$5,560 – 2,565 = $2,995

 
b.

NWC 2010	=	CA10 – CL10 = $934 – 375 = $559
NWC 2011	=	CA11 – CL11 = $984 – 398 = $586
Change in NWC	=	NWC11 – NWC10 = $586 – 559 = $27

 
c.

We can calculate net capital spending as:

Net capital spending = Net fixed assets 2011 – Net fixed assets 2010 + Depreciation

Net capital spending = $4,576 – 3,897 + 1,060 = $1,739

 

So, the company had a net capital spending cash flow of $1,739. We also know that net capital spending is:

 

Net capital spending	=	Fixed assets bought – Fixed assets sold
$1,739	=	$1,845 – Fixed assets sold
Fixed assets sold	=	$1,845 – 1,739 = $106

To calculate the cash flow from assets, we must first calculate the operating cash flow. The income statement is:

 

Income Statement
Sales	$	11,770
Costs		5,710
Depreciation expense		1,060
EBIT	$	5,000
Interest expense		180
EBT	$	4,820
Taxes (35%)		1,687
Net income	$	3,133

 

So, the operating cash flow is:

OCF = EBIT + Depreciation – Taxes = $5,000 + 1,060 –1,687 = $4,373

And the cash flow from assets is:

 

Cash flow from assets	=	OCF – Change in NWC – Net capital spending.
	=	$4,373 – 27 – 1,739 = $2,607