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WEEK 1 HOMEWORK
Q2-1. For each of the following activities state whether there is an increase, decrease, or no change in a
a. sell common stock –
b. Sell inventory at cost –
c. increase notes payable –
d. pay dividends –
d. decrease fixed assets –
e. buy inventory –
f. decrease accounts payable –
g. decrease accounts payable –
P2-1. Statement of Cash Flows Omala Inc. reported 2017 net income of $10 million and depreciation
of $2 million. The top part of Omala, Inc.’s 2016 and 2017 balance sheets is listed below (in millions of
Current assets: 2016 2017 Current liabilities: 2016 2017
Cash and securities $ 11 $ 14 Accrued wages and taxes $ 12 $ 13
Accounts receivable 50 56 Accounts payable 30 34
Inventory 54 80 Notes payable 26 32
Total $ 115 $ 150 Total $ 68 $ 79
Calculate the 2017 net cash flow from operating activities for Omala, Inc..
Cash Flows from Operating Activities
Additions (sources of cash):
Increase accrued wages and taxes
Increase in accounts payable
Subtractions (uses of cash):
Increase in accounts receivable
Increase in inventory
Net cash flow from operating activities:
P2-2 Free Cash Flow You are considering an investment in Fivestone, Inc. and want
to evaluate the firm’s free cash flow. From the income statement, you see that
Fivestone earned an EBIT of $32 million, paid taxes of 25% ($8 million), and its
depreciation expense was $3 million. Fivestone’s gross fixed assets increased by $16
million from 2016 to 2017. The firm’s current assets increased by $10 million and
spontaneous current liabilities increased by $6 million.
Calculate Fivestone’s operating cash flow, investment in operating capital
and free cash flow for 2017.
First calculate Fivestone’s operating cash flow by:
OCF = EBIT – Taxes + Depreciation
Then, Investment in operating capital for 2017 by:
IOC = ΔGross fixed assets + ΔNet operating working capital
Finally, Fivestone’s free cash flow for 2017 by:
FCF = Operating cash flow – Investment in operating capital
P2-3 Market Value versus Book Value Mann’s Buns Bakery, Inc. balance
sheet lists net fixed asset as $28 million. The fixed assets could currently be sold for
$38 million. Muffin’s current balance sheet shows current liabilities of $11 million and
net working capital of $9 million. If all the current accounts were liquidated today, the
company would receive $15 million cash after paying $12 million in liabilities.
What is the book value of Mann’s Buns Bakery’s assets today?
What is the market value of these assets?
Step 1. Net working capital (book value) =
Current assets (book value) – Current liabilities (book value)
Step 2. Total assets (book value) = Current assets (book value) + Fixed assets (book
Step 3. Net working capital (market value) =
Current assets (market value) – Current liabilities (market value)
Step 4. Total assets (market value) =
Current assets (market value) + Fixed assets (market value)