Profitability Declines and the Statement of Cash Flows
The Bookbarn Inc. is a retail seller of new books in a moderate-sized city. Although initially very successful, The Bookbarn’s sales volume has declined since the opening of two competing bookstores 2 years ago. The accountant for The Bookbarn prepared the following statement of cash flows at the end of the current year:
Your analysis suggests that The Bookbarn’s net income will continue to decline by $8,000 per year to $18,500 as sales continue to fall. Thereafter, you expect sales to stabilize.
Assume that equipment is nearly fully
Want to see the full answer?
Check out a sample textbook solutionChapter 11 Solutions
Cornerstones of Financial Accounting
- The Raattama Corporation had sales of $3.5 million last year, and it earned a 5% return (after taxes) on sales. Recently, the company has fallen behind in its accounts payable. Although its terms of purchase are net 30 days, its accounts payable represents 60 days’ purchases. The company’s treasurer is seeking to increase bank borrowing in order to become current in meeting its trade obligations (that is, to have 30 days’ payables outstanding). The company’s balance sheet is as follows (in thousands of dollars): How much bank financing is needed to eliminate the past-due accounts payable? Assume that the bank will lend the firm the amount calculated in part a. The terms of the loan offered are 8%, simple interest, and the bank uses a 360-day year for the interest calculation. What is the interest charge for 1 month? (Assume there are 30 days in a month.) Now ignore part b and assume that the bank will lend the firm the amount calculated in part a. The terms of the loan are 7.5%, add-on interest, to be repaid in 12 monthly installments. What is the total loan amount? What are the monthly installments? What is the APR of the loan? What is the effective rate of the loan? Would you, as a bank loan officer, make this loan? Why or why not?arrow_forwardYou have recently been hired to improve the performance of Maitland Corporation, which has no idea how the company is performing with cash. In one part of your analysis, you want to determine the firm’s Net working capital. Using the following information as a 360-day year. Current Inventory = $105,000. Annual Sales = $450,000. The cost of goods sold is 70% of sales Accounts receivable = $95,000. Accounts payable = $15,000. Total annual purchases =$220,000. Purchases credit terms: net 30 days. Receivables credit terms: net 50 days. What is Maitland Corporation Net Working Capital?arrow_forwardA company with current-year sales of $4,500,000 and cost of goods sold of $3,248,000 reduced its inventory days from 119 days in the prior year to 115 days for the current year. Its receivable days slowed from 40 days to 43 days. What was the cash flow effect of these swing-factor efficiency changes?arrow_forward
- You have recently been hired to improve the performance of Multiplex Corporation, which has been experiencing a severe cash shortage. As one part of your analysis, you want to determine the firm’s cash conversion cycle. Using the following information and a 365-day year,(a) what is your estimate of the firm’s current cash conversion cycle? Current inventory = $241,000.00 • Annual sales = $1,200,000.00 • Accounts receivable = $300,000.00 • Accounts payable = $245,000.00 • Total annual purchases = $600,000.00 • Purchases credit terms: net 30 days. • Receivables credit terms: net 50 days.arrow_forwardData on Shick Inc. for last year are shown below, along with the days sales outstanding of the firms against which it benchmarks. The firm's new CFO believes that the company could reduce its receivables enough to reduce its DSO to the benchmarks' average. If this were done, by how much would receivables decline? Use a 365 day year. Do not round yourData on Shick Inc. for last year are shown below, along with the days sales outstanding of the firms against which it benchmarks. The firm's new CFO believes that the company could reduce its receivables enough to reduce its DSO to the benchmarks' average. If this were done, by how much would receivables decline? Use a 365-day year. Do not round your intermediate calculations. Sales $103, 000 Accounts receivable $16,000 Days Sales Outstanding (DSO) 56.699 Benchmarks' Days Sales Outstanding (DSO) 19.000 a. $9,805 b. $11,471 c. $10, 638 d. $4,529arrow_forward1. Assume that $1,000 is to be received 30 years from today. Compare the present values obtained using 0.05 and 0.20 as rates of discount. 2. The ABC Company has opened 10 new stores. It has incurred a great deal of expenses associated with opening the stores, and the stores have not yet built up enough clientele to be profitable. On the other hand, the stores are operating at profit levels exceeding expectations, and there are indications that they will be very profitable in the future. It is obvious that the stock market has not yet digested this latter fact, and the additional 50 stores this year, but to do so will require new stockholder capital acquired from the market (it has borrowed all it feels it is prudent to borrow and cannot obtain more capital from its current stockholders). Without the new capital, the stockholders can expect to earn an equivalent annual return of 0.15 on the current market value of their investment (assume there is $100 million or 1 million shares of…arrow_forward
- (Calculating free cash flows) Spartan Stores is expanding operations with the introduction of a new distribution center. Not only will sales increase but investment in inventory will decline due to increased efficiencies in getting inventory to showrooms. As a result of this new distribution center, Spartan expects a change in EBIT of $900,000. Although inventory is expected to drop from $82,000 to $65,000, accounts receivables are expected to climb as a result of increased credit sales from $85,000 to $190,000. In addition, accounts payable are expected to increase from $67,000 to $84,000. This project will also produce $400,000 of bonus depreciation in year 1 and Spartan Stores is in the 35 percent marginal tax rate. What is the project's free cash flow in year 17 The project's free cash flow in year 1 is $ (Round to the nearest dollar) GTTSarrow_forwardA market research firm with current sales of $750 does not expect any growth in sales for the next two years. The company, however, anticipates that expenses, currently at $160, will increase to $240 next year and to $270 the year after. Assuming a tax rate of 34%, determine the firm’s cash flow in year two. Assume straight line depreciation of $50 each year. Select one: a. ($333.80) b. $389.40 c. ($389.40) d. $333.80 e. $366.00 Clear my choicearrow_forwarden experiencing a severe cash shortage. As one part of your analysis, you want to determine the firm’s cash conversion cycle. Using the following information and a 365-day year,(b) what is your Net Working Capital • Current inventory = $ 180,000.00 • Annual sales = $ 700,000.00 • Accounts receivable = $ 165,000.00 • Accounts payable = $ 85,000.00 • Total annual purchases = $ 567,000.00 • Purchases credit terms: net 30 days. • Receivables credit terms: net 50 daysarrow_forward
- Strickler Technology is considering changes in its working capital policies to improve its cash flow cycle. Stricklers sales last year were 3,250,000 (all on credit), and its net profit margin was 7%. Its inventory turnover was 6.0 times during the year, and its DSO was 41 days. Its annual cost of goods sold was 1,800,000. The firm had fixed assets totaling 535,000. Stricklers payables deferral period is 45 days. a. Calculate Stricklers cash conversion cycle. b. Assuming Strickler holds negligible amounts of cash and marketable securities, calculate its total assets turnover and ROA. c. Suppose Stricklers managers believe the annual inventory turnover can be raised to 9 times without affecting sale or profit margins. What would Stricklers cash conversion cycle, total assets turnover, and ROA have been if the inventory turnover had been 9 for the year?arrow_forwardLucas Hunter, president of Simmons Industries Inc., believes that reporting operating cash flow per share on the income statement would be a useful addition to the companys just completed financial statements. The following discussion took place between Lucas Hunter and Simmons controller, John Jameson, in January, after the close of the fiscal year: Lucas: Ive been reviewing our financial statements for the last year. I am disappointed that our net income per share has dropped by 10% from last year. This wont look good to our shareholders. Is there anything we can do about this? John: What do you mean? The past is the past, and the numbers are in. There isnt much that can be done about it. Our financial statements were prepared according to generally accepted accounting principles, and I dont see much leeway for significant change at this point. Lucas: No, no. Im not suggesting that we cook the books. But look at the cash flow from operating activities on the statement of cash flows. The cash flow from operating activities has increased by 20%. This is very good newsand, I might add, useful information. The higher cash flow from operating activities will give our creditors comfort. John: Well, the cash flow from operating activities is on the statement of cash flows, so I guess users will be able to see the improved cash flow figures there. Lucas: This is true, but somehow I think this information should be given a much higher profile. I dont like this information being buried in the statement of cash flows. You know as well as I do that many users will focus on the income statement. Therefore, I think we ought to include an operating cash flow per share number on the face of the income statementsomeplace under the earnings per share number. In this way, users will get the complete picture of our operating performance. Yes, our earnings per share dropped this year, but our cash flow from operating activities improved! And all the information is in one place where users can see and compare the figures. What do you think? John: Ive never really thought about it like that before. I guess we could put the operating cash flow per share on the income statement, underneath the earnings per share amount. Users would really benefit from this disclosure. Thanks for the ideaIll start working on it. Lucas: Glad to be of service. How would you interpret this situation? Is John behaving in an ethical and professional manner?arrow_forwardConsider the case of Hungry Whale Electronics Company: Hungry Whale Electronics Company is a mature firm that has a stable flow of business. The following data was taken from its financial statements last year: Annual sales $10,500,000 Cost of goods sold $6,825,000 Inventory $3,100,000 Accounts receivable $1,900,000 Accounts payable $2,400,000 Hungry Whale’s CFO is interested in determining the length of time funds are tied up in working capital. Use the information in the preceding table to complete the following table. (Note: Use 365 days as the length of a year in all calculations, and round all values to two decimal places.) Value Inventory Conversion Period Average collection period Payables Deferral Period Cash conversion cycle Both the inventory conversion period and payables deferral period use the average daily COGS in their denominators, whereas the average collection period uses average daily sales in…arrow_forward
- Cornerstones of Financial AccountingAccountingISBN:9781337690881Author:Jay Rich, Jeff JonesPublisher:Cengage LearningIntermediate Financial Management (MindTap Course...FinanceISBN:9781337395083Author:Eugene F. Brigham, Phillip R. DavesPublisher:Cengage LearningFinancial AccountingAccountingISBN:9781337272124Author:Carl Warren, James M. Reeve, Jonathan DuchacPublisher:Cengage Learning