1 / 16

Chapter 3 Questions

Chapter 3 Questions. Q1. What does the Balance Sheet communicate? Q2. Review the Balance Sheet for Allied Food Products in the textbook. What does the 12/31/11 balance for Accounts Receivable mean, and what does the change in this balance for 2011 mean?

amy
Download Presentation

Chapter 3 Questions

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. Chapter 3 Questions Q1. What does the Balance Sheet communicate? Q2. Review the Balance Sheet for Allied Food Products in the textbook. What does the 12/31/11 balance for Accounts Receivable mean, and what does the change in this balance for 2011 mean? Q3. What does the Income Statement communicate?

  2. Chapter 3 Questions Q1. What does the Balance Sheet communicate? A1. It shows the historical cost of all assets purchased on a cumulative basis and still in service less any applicable accumulated depreciation for long-term assets (“book value”), as well as a list of the major categories of liabilities and equity capital used to finance the purchase of those assets. Q2. Review the Balance Sheet for Allied Food Products in the textbook. What does the 12/31/11 balance for Accounts Receivable mean, and what does the change in this balance for 2011 mean? Q3. What does the Income Statement communicate?

  3. Chapter 3 Questions Q1. What does the Balance Sheet communicate? A1. It shows the historical cost of all assets purchased on a cumulative basis and still in service less any applicable accumulated depreciation for long-term assets (“book value”), as well as a list of the major categories of liabilities and equity capital used to finance the purchase of those assets. Q2. Review the Balance Sheet for Allied Food Products in the textbook. What does the 12/31/11 balance for Accounts Receivable mean, and what does the change in this balance for 2011 mean? Q2. The balance of $375 million of Accounts Receivable means $375 million of the Company’s sales made of credit had not yet been collected as of 12/31/2011. During 2011, the 12/31/10 balance of $315 million was collected, and then an additional $375 million of A/R was added. The change of +$60 million represents a 19.05% increase in the FYE balance (versus sales growth in 2011 of 5.26%). The increase in A/R means the total amount of sales are growing, and/or the total amount of sales on credit are growing, and/or the Company’s collection efforts are becoming less productive, and/or that customers have slowed-down their payment rate in general. Q3. What does the Income Statement communicate?

  4. Chapter 3 Questions Q1. What does the Balance Sheet communicate? A1. It shows the historical cost of all assets purchased on a cumulative basis and still in service less any applicable accumulated depreciation for long-term assets (“book value”), as well as a list of the major categories of liabilities and equity capital used to finance the purchase of those assets. Q2. Review the Balance Sheet for Allied Food Products in the textbook. What does the 12/31/11 balance for Accounts Receivable mean, and what does the change in this balance for 2011 mean? Q2. The balance of $375 million of Accounts Receivable means $375 million of the Company’s sales made of credit had not yet been collected as of 12/31/2011. During 2011, the 12/31/10 balance of $315 million was collected, and then an additional $375 million of A/R was added. The change of +$60 million represents a 19.05% increase in the FYE balance (versus sales growth in 2011 of 5.26%). The increase in A/R means the total amount of sales are growing, and/or the total amount of sales on credit are growing, and/or the Company’s collection efforts are becoming less productive, and/or that customers have slowed-down their payment rate in general. Q3. What does the Income Statement communicate? Q3. The Income Statement shows for a designated period of time (i.e., one month, one quarter, or one year) the total value of all products sold, the cost to the company of those goods/services sold, all other expenses incurred during the designated period, and whether or not the total value of sales was more than, equal to or less than the total amount of expenses (i.e., net earnings or net losses).

  5. Chapter 3 Questions Q4. Analyze the Income Statement for Allied Food Products. What happened to Sales in 2011 compared to 2010? Q5. How many different levels of Profitability are displayed on this company’s Income Statement?

  6. Chapter 3 Questions Q4. Analyze the Income Statement for Allied Food Products. What happened to Sales in 2011 compared to 2010? A4. Sales increased from $2,850 million ($2.85 billion) to $3,000 million ($3.0 billion), an increase of $150 million or up 5.26% Q5. How many different levels of Profitability are displayed on this company’s Income Statement?

  7. Chapter 3 Questions Q4. Analyze the Income Statement for Allied Food Products. What happened to Sales in 2011 compared to 2010? A4. Sales increased from $2,850 million ($2.85 billion) to $3,000 million ($3.0 billion), an increase of $150 million or up 5.26% Q5. How many different levels of Profitability are displayed on this company’s Income Statement? A5. Four: EBITDA, EBIT, EBT and Net Income.

  8. Chapter 3 Questions Q6. What four things are communicated in the Cash Flow Statement? Q7. What is unusual about the Cash Flow Statement compared to the Income Statement and Balance Sheet (generally). Q8. According to the Cash Flow Statement for Allied Food Products, how much net cash flow was produced from its financing activities in 2011? Q9. What is the formula for Net Operating Profit After Tax (“NOPAT”) and what does it measure?

  9. Chapter 3 Questions Q6. What four things are communicated in the Cash Flow Statement? A6. Gross cash flow from operations; total investing expenditures; total net funds from financing activities; and the net change in the company’s balance of cash. Q7. What is unusual about the Cash Flow Statement compared to the Income Statement and Balance Sheet (generally). Q8. According to the Cash Flow Statement for Allied Food Products, how much net cash flow was produced from its financing activities in 2011? Q9. What is the formula for Net Operating Profit After Tax (“NOPAT”) and what does it measure?

  10. Chapter 3 Questions Q6. What four things are communicated in the Cash Flow Statement? A6. Gross cash flow from operations; total investing expenditures; total net funds from financing activities; and the net change in the company’s balance of cash. Q7. What is unusual about the Cash Flow Statement compared to the Income Statement and Balance Sheet (generally). A7. There are no separate general ledger accounts for the CF Statement lines items like there are for the Income Statement and the Balance Sheet; the CF Statement is derived from the changes to the Balance Sheet account balances. Q8. According to the Cash Flow Statement for Allied Food Products, how much net cash flow was produced from its financing activities in 2011? Q9. What is the formula for Net Operating Profit After Tax (“NOPAT”) and what does it measure?

  11. Chapter 3 Questions Q6. What four things are communicated in the Cash Flow Statement? A6. Gross cash flow from operations; total investing expenditures; total net funds from financing activities; and the net change in the company’s balance of cash. Q7. What is unusual about the Cash Flow Statement compared to the Income Statement and Balance Sheet (generally). A7. There are no separate general ledger accounts for the CF Statement lines items like there are for the Income Statement and the Balance Sheet; the CF Statement is derived from the changes to the Balance Sheet account balances. Q8. According to the Cash Flow Statement for Allied Food Products, how much net cash flow was produced from its financing activities in 2011? A8. $162.5 million (see CF Statement for details). Q9. What is the formula for Net Operating Profit After Tax (“NOPAT”) and what does it measure?

  12. Chapter 3 Questions Q6. What four things are communicated in the Cash Flow Statement? A6. Gross cash flow from operations; total investing expenditures; total net funds from financing activities; and the net change in the company’s balance of cash. Q7. What is unusual about the Cash Flow Statement compared to the Income Statement and Balance Sheet (generally). A7. There are no separate general ledger accounts for the CF Statement lines items like there are for the Income Statement and the Balance Sheet; the CF Statement is derived from the changes to the Balance Sheet account balances. Q8. According to the Cash Flow Statement for Allied Food Products, how much net cash flow was produced from its financing activities in 2011? A8. $162.5 million (see CF Statement for details). Q9. What is the formula for Net Operating Profit After Tax (“NOPAT”) and what does it measure? A9. NOPAT = EBIT x (1 less the income tax rate). The profit a company would generate if it had no debt (and therefore no interest expense) and only had operating assets (with no financial assets it would not have any interest income, either).

  13. Chapter 3 Questions Q10. What is Free Cash Flow (“FCF”), and why is it important? Q11. Explain how Free Cash Flow was computed for Allied Food Products for 2011. Q12. Obviously, the $(109.7) million of Free Cash Flow for this company was not enough to cover its Weighted Average Cost of Capital. What changes could Management make to improves its Free Cash Flow performance?

  14. Chapter 3 Questions Q10. What is Free Cash Flow (“FCF”), and why is it important? A10. Free Cash Flow represents the amount of after-tax operating cash flow (after subtracting capital expenditures and investment in net operating working capital). It represents the amount of net cash flow available to the business owners which they are “free” to distribute to lenders and to all stockholders. There are basically 5 things that can be done with Free Cash Flow: 1. Debt service payments; 2. Dividends to stockholders; 3. Investments in business assets/projects to grow the company; 4. Extraordinary compensation to management/employees; and 5. Charitable and other contributions. Q11. Explain how Free Cash Flow was computed for Allied Food Products for 2011. Q12. Obviously, the $(109.7) million of Free Cash Flow for this company was not enough to cover its Weighted Average Cost of Capital. What changes could Management make to improves its Free Cash Flow performance?

  15. Chapter 3 Questions Q10. What is Free Cash Flow (“FCF”), and why is it important? A10. Free Cash Flow represents the amount of after-tax operating cash flow (after subtracting capital expenditures and investment in net operating working capital). It represents the amount of net cash flow available to the business owners which they are “free” to distribute to lenders and to all stockholders. There are basically 5 things that can be done with Free Cash Flow: 1. Debt service payments; 2. Dividends to stockholders; 3. Investments in business assets/projects to grow the company; 4. Extraordinary compensation to management/employees; and 5. Charitable and other contributions. Q11. Explain how Free Cash Flow was computed for Allied Food Products for 2011. A11. Free Cash Flow = [ (EBIT x (1 less inc.tax rate)) plus Depreciation/Amort.] less [Capital Expenditures] less [Change in Net Operating Working Capital] Free Cash Flow = [ ($283.8 x (1 – 0.40)) + $100 = $270.3 ] less [ $230 ] less [ ($1,000 – ($60+$140)) less ($810 – ($30 + $130)) = $150 ] = $(109.7) Q12. Obviously, the $(109.7) million of Free Cash Flow for this company was not enough to cover its Weighted Average Cost of Capital. What changes could Management make to improves its Free Cash Flow performance?

  16. Chapter 3 Questions Q10. What is Free Cash Flow (“FCF”), and why is it important? A10. Free Cash Flow represents the amount of after-tax operating cash flow (after subtracting capital expenditures and investment in net operating working capital). It represents the amount of net cash flow available to the business owners which they are “free” to distribute to lenders and to all stockholders. There are basically 5 things that can be done with Free Cash Flow: 1. Debt service payments; 2. Dividends to stockholders; 3. Investments in business assets/projects to grow the company; 4. Extraordinary compensation to management/employees; and 5. Charitable and other contributions. Q11. Explain how Free Cash Flow was computed for Allied Food Products for 2011. A11. Free Cash Flow = [ (EBIT x (1 less inc.tax rate)) plus Depreciation/Amort.] less [Capital Expenditures] less [Change in Net Operating Working Capital] Free Cash Flow = [ ($283.8 x (1 – 0.40)) + $100 = $270.3 ] less [ $230 ] less [ ($1,000 – ($60+$140)) less ($810 – ($30 + $130)) = $150 ] = $(109.7) Q12. Obviously, the $(109.7) million of Free Cash Flow for this company was not enough to cover its Weighted Average Cost of Capital. What changes could Management make to improves its Free Cash Flow performance? A12. 1. Increase EBIT (by increasing sales and improving operating profitability0; 2. Reduce effective income tax rate (by making investments which reduce taxes); 3. Reduce capital expenditures; and 4. Reduce investment in Net Operating Working Capital.

More Related