Accounting 211 test 4

Cost of the investment...........................................$48,000 Life of the project...................................................5 years Annual cost savings................................................$15,000 Estimated salvage value..........................................$4,000 Discount rate...........................................................8% The net present value of the proposed investment is:

$14,619 NVP=future pv annuity (15,000) + pv factor (4,000) =14,619

Stephan Riley Corporation for last year Operating income................................................$235,000 Net increase in all current assets except cash.......$43,000 Net decrease in current liabilities.........................$25,000 Cash dividends paid on common stock................$32,000 Gain on sale of investments.................................$10,000 Depreciation expense..........................................$12,000 What is the net cash provided by operating activities for last year on the statement of cash flows for the Stephan Riley Corporation?

$169,000

Tierra Firma is considering investing $240,000 in hardware and software to develop a business-to-business (B2B) portal. The company expects the portal to save $60,000 each year for the six years of its useful life.

$240,000/$60,000 = 4 years

What is the earnings per share for the current year?

$4.94 NI-PSD(0)/ # of shares outstanding 173,000/35,000= 4.94

Assets Increase/(Decrease) Accounts receivable $10,000 Inventory $15,000 Prepaid expenses ($7,000) Dep Expense $11,000 Liablities Increase/(Decrease) Accounts Payable $20,000 Wages payable ($12,000) Taxes payable $9,000 The companies operating income for the year was $35,000. Depreciation expense for the year was $11,000. What is the net cash provided by operating activities for the last year on the statement of cash inflows (using indirect method)

$45,000

The Samantha Helms Corporation uses the indirect method of preparing their statement of cash flows. Selected ending balances for Samantha Helms are listed: Item End of this year End of Prior year Building..............$356,000 $0 Equipment..........$111,000 0 Notes Payable.....$39,000 30,000 Common Stock...$312,000 230,000 Dividends...........$24,000 Net income for this year was $97,000. The common stock was issued for cash. What was the net cash provided by financing activities?

$64,400 312,400-230,000=82,400 39,000-33,000 =6,000 Dividends = -24,000 =64,400

What is the NPV of the investment assuming a minimum required rate of return of 10%?

$68,235

NPV

(annuity PV x annual net cash inflows) - investment

Proposal Investment Net Present Value 1.............................$50,000 $30,000 2............................$60,000 $24,000 3............................$30,000 $15,000 4............................$45,000 $9,000 Rank the proposals in terms of preference according to the project profitability index(PI):

1,3,2,4

What is the Acid Test Ratio for the current year?

1.46 QA/CL 113,000-30,000/57,000=1.46 QA=current assets- investment pp expenses

End of current year End of prior year Net sales revenue 1,220,000 Cost of goods sold 725,000 Gross profit 495,000 Selling/general expenses 280,000 Interest expenses 42,000 Net income 173,000 Current Assets 113,000 82,000 Long-term assets 512,000 440,000 Total Assets 625,000 522,000 Current liabilities 57,000 52,000 Long-term liabilities 275,000 245,000 Common stockholders equity 293,000 225,000 Tot liabilities and stockholders equity 625,000 522,000 Inventory and prepaid expenses account for $30,000 of the current years current assets. Avg inv for the current year is $36,250 Avg net acc rec for the current year is $45,000 Theres 35,000 shares of common stockoutstanding Tot dividends paid during the current year were $17,000 The market price per share of common stock is $20 What is the current ratio for the current year?

1.98 CA/CL 113,000/57,000=1.98

The Kelsea Long Company is considering investing $2.26 million in a project that is expected to generate cash flows of $400,000 per year for 10 years. The project is expected to have no residual value. What is the internal rate of return(IRR) of the project?

12% Investment/ annual net cash inflows 2,260,000/400,000

What is the rate of return on net sales for the current year?

14.18% Net income/Net sales 173,000/1,220,000= 14.18

What is the inventory turnover for the current year?

20 times COGS/Avg Inventory 725,000/36,250=20

What is the accounts receivable turnover for the current year?

27.11 times Net credit sales/ Avg net accounts receivable 1,220,000/45,000=27.11

The Kandss Kutz company is planning a $260,000 equipment investment which has an estimated 5 year life with no estimated salvage value. The company has projected the following annual cash flows for the investment. Year Cash Inflows 1.........................................$60,000 2........................................$80,000 3........................................$90,000 4........................................$105,000 5........................................$110,000 Total.................................$445,000 Assuming that the annual cash inflows occur evenly over the year, the payback period for the investment is:

3.286 years 3+ (30,000/105,000) =3.286

The Ricardo Salas company has $800,000 in operating assets. Ricardo Salas is considering the purchase of a machine that costs $75,000 and which is expected to reduce operating costs by $20,000 each year. The payback period for this machine in years is closest to:

3.75 years 75,000/20,000 Amount invested/ net cash inflows

What is the rate of return on total assets for the current year?

37.49% Net income + interest expense/Avg total assets(BI+EI/2) 173,000+42,000/573,500= 37.49

What is the rate of return on common stockholders equity for the current year?

66.80% NI- PSD (0)/Avg common SE 173,000/259,000=66.80

The Rand Youngblood Corporation is considering a technologically obsolete machine with a new state-of-the-art numerically controlled machine. Cost of new machine...............$450,000 Salvage value............................0 Life of new machine................10 years Net cash savings per year.........$80,000 The accounting rate of return (ARR) on the new machine is closest to:

7.78% ARR= annual net cash inflows - annual dep expense/ initial investment Dep=450,000/10=45,000 80,000-45,000/450,000 =.0778

Time Value of Money

A dollar today is worth MORE than a dollar in some future period

The time value of money means that:

A dollar today is worth more than a dollar in some future period.

Which of the following is an example of a capital asset?

A. The item involves a significant sum of money B. The item will be used for a long period of time Both A and B

Capital Budgeting

Acquisition of assets used for a long period of time and which require large sums of money

On the statement of cash flows,which of the following activities are included in the financing activities section?

Activities that obtain the cash needed to launch and sustain the business

Payback Period

Amount invested/expected annual net cash inflows

Annual Cash flow: 100,000 80,000 50,000 50,000 50,000 30,000 =360,000

Average Annual Cash Flows: 360,000/6 = 60,000 Annual Dep Exp: 240,000-30,000/6= 35,000 ARR: 60,000- 35,000/ 240,000 = 10.42%

Average Rate of Return (ARR)

Avg Annual oper. Income from asset/ Initial Investment Or Average annual net cash flows - Annual depreciation expense/ Initial investment

Interest income and dividend income

Both classified as cash flows from operating activities because they affect (increase) net income

Inventory turnover

COGS/ avg. inventory

Payment of dividends

Classified as a financing activity

Interest expense

Classified as an operating activity because it affects (decreases) net income

Current Ratio

Current assets/Current liabilities

Net Present Value

Discount Rate - Required minimum rate of return

Dividend yield

Dividends per share/market price per share

Cash Flows

Future Cash Revenue, Any future savings in ongoing cash operating costs, any future residual value of the asset

By converting dollars to be received in the future into current dollars, the present value methods take into consideration that money

Has a time value

Which type of analysis compares the data of the current year to the data of the previous year in both percentage and dollar amount of increase or decrease?

Horizontal analysis

The payback method measures:

How quickly investment dollars may be recovered

Capital Budgeting Process

Identify potential investments, Project the net cash inflows, Analyse the investments, Capital rationing, Post- audit

Annual Depreciation

Initial cost of investment - Residual value/ Useful life of asset (in years)

When to invest in capital assets

Invest: when expected accounting rate of return equals or exceeds the required rate of return Dont Invest: when expected accounting rate of return is less than the required rate of return

Which of the following statements from the statement of cash flows includes activities that increase and decrease long-term assets?

Investing section

Annuity PV factor

Investment ÷ Annual Net Cash Inflows

Payback

Length of time it takes to recover the cost of investment Amount Invested/Expected annual net cash inflows

Gains or losses

On property, plant, or equipment transactions - classified as an operating activity because it affects net income

The ______ statement from the statement of cash flows includes activities that create revenue, expenses, gains and losses.

Operating

Profitability Index

PU of net cash inflows/investment

Future Value

Present Value + Interest Earned = Future Value

Profitability Index

Present value of net cash inflows/ Investment

If the cash flows were reversed (that is Year 1 CF=$110,000, Year 2 CF=$105,000,etc.) the NPV of the investment would be:

Significantly Larger

Cost Savings

Tax breaks, Grants, Lower operating costs

Which of the following methods does not incorporate the Time Value of Money concept?

The accounting rate of return model

A company sold equipment with a book value of $10,000 at a gain of $2,500. How much will be reported in the investment activities section of the statement of cash flows as cash received upon the scale of the equipment?

The cash received upon the scale of equipment was $12,500

Cash Generating Activities

The statement of cash flows classifies all business transactions into three different types of activities -Operating activities Day-to-day profit-making activities -Investing activities Involves buying or selling long-term assets -Financing activities Generate capital for the company or pay it back

Which of the following is true about a statement of cash flows?

The statement of cash flows is one of the required financial statements for publicly-held companies.

Compound Interest

Year Interest Calc. Simple Int 1 $10,000 (6%) $600 2 $10,000 + $600 (6%) $636 3 $10,000 + $600 +$636 (6%) $674 4 $10,000 + $600 + $636 + $674 (6%) $715 5 $10,000 + $600 + $636 +$674 +$715 (6%) $758 Tot. Interest= $3,383

Simple Interest

Year Interest Calc. Simple Interest 1 $10,000 x 6% $600 2 $10,000 x 6% $600 3 $10,000 x 6% $600 4 $10,000 x 6% $600 5 $10,000 x 6% $600 Tot. Interest= $3,000

ARR

avg. annual net cash inflows- annual dep exp./initial investment

Days sales in AR

avg. net AR/one days sales

Working capital

current assets-current liabilities

Times interest earned

income from operations/interest expense

Annual depreciation expense

initial cost of investment-residual value/useful life of asset

The three major categories included on the statement of cash flows are:

investing, operating, and financing activities

Price/earnings ratio

market price per share/EPS

AR turnover

net credit sales/ avg. net AR

Rate of return on total assets

net income+interest expense/avg. total assets

EPS of common stock

net income-preferred dividends/# of shares of CS outstanding

Rate of return on current SE

net income-preferred dividends/avg. common SE

Rate of return on net sales

net income/net sales

Future Value

present value+interest earned

Acid test

quick assets/current liabilities qa= cash, ST investments, net receivables

Book value per share of CS

total SE-preferred equity/# of shares of CS outstanding

Debit ratio

total liabilities/ total assets

Using a base year as 100% and expressing other years as a percentage of the base year is an example of:

trend analysis