This ratio is a more realistic one than the ratio for the number of times in- terest earned because interest has to be paid with cash, not with net income. This ratio can provide a more obvious warning that an inability to pay interest may be on the horizon than does the traditional interest coverage ratio. The higher this ratio is, the more comfortable the creditors will be. CASH FLOW FROM OPERATING ACTIVITIES MARGIN The cash flow from operating activities margin ratio is a profitability ratio and is calculated as follows: In our case, given the cash flow amount of $290,900 and Exhibit 10.1, the calculation is ᎏ $ $ 7 2 ,2 9 6 0 2 ,9 ,4 0 0 0 0 ᎏ ؍ 0.04, or 4 ᎏ ᎏ % ᎏ ᎏ The ratio compares the amount of cash generated per dollar of sales. Al- though this ratio is similar to the profit margin ratio discussed earlier, it is again considered more realistic since it compares sales revenues with cash rather than net income. In our case, because the cash flow of $290,900 is higher than the net in- come of $141,100, we know the cash flow from operating activities margin ra- tio will be higher than the profit margin ratio because both ratios use the same denominator. ANALYSIS OF CHANGES TO WORKING CAPITAL The SCF provides additional information needed for effective cash man- agement and budget planning. Working capital analysis is closely related to the SCF and provides another view of information in support of effective manage- ment of cash. Working capital is defined as the excess of current assets compared to current liabilities, and indicates the amount of excess current assets relative to current liabilities available to conduct revenue-generating operations. Total cur- rent asset minus total current liabilities is the value of working capital (CA Ϫ CL). These terms are defined as follows: Cash flow from operating activities ᎏᎏᎏᎏ Sales revenue 428 CHAPTER 10 CASH FLOWS AND WORKING CAPITAL ANALYSIS 4259_Jagels_10.qxd 4/14/03 11:04 AM Page 428 Current assets consist of cash, marketable securities, notes receivable, credit card receivables, accounts receivable, inventories (for resale), sup- plies, and prepaid expenses. Current assets are resources that will be con- sumed in the production of sales revenue in the next operating period. Current liabilities consist of accounts payable, accrued expenses (e.g., wages and salaries payable, interest payable, taxes payable), and notes payable. Current liabilities represent operating costs that were incurred on credit and will be paid in the next operating period. The preparation of a statement of changes in working capital is simi- lar in many ways to the preparation of an SCF. However, the analysis of work- ing capital differs in a number of ways from the cash flow analysis, and serves different purposes. Working capital analysis evaluates changes to working capital over an op- erating period for the following purposes: It shows how working capital increased, by identifying the inflows that created the increase. It shows how working capital decreased, by identifying the outflow that created the decrease. It is used to find the net changes to working capital during the completed operating period. It provides management with information related to the effectiveness of working capital controls during the operating period. It provides prospective lenders with information so they can evaluate their risk in lending funds to the hospitality organizations. INFLOWS — SOURCES OF WORKING CAPITAL The following are the major inflows or sources that will increase working capital. Income from operations. In general terms, accrued income is sales rev- enue less all expenses incurred (including income tax) in producing the sales revenue inflow. Sales revenue is generated by cash sales or on credit through receivables that eventually become cash. Expenses are incurred by immediate payment of cash or on credit through payables. The payables, accounts payable, and accrued payables will eventually be paid. Net income is expected to increase the organization’s cash accounts and increase working capital. Accrual net income. This is determined after deducting noncash expenses. Such noncash expenses adjust the book or carrying value of long-term assets through depreciation and/or by recognizing amortization expense. To convert net income to the increase in working capital, all capitalized ANALYSIS OF CHANGES TO WORKING CAPITAL 429 4259_Jagels_10.qxd 4/14/03 11:04 AM Page 429 expenses must be added back to net income. This uses the same proce- dure followed in the operating activities section of the SCF. Other items that are handled in the same way as depreciation and amortization ex- penses may consist of prepaid franchise fees or the amortization of other intangible assets such as goodwill. Sale of long-term or other noncurrent assets. These include land, build- ing, furniture, equipment, or an investment. Their sale is treated as an in- flow, which increases working capital. The sale will create an increase in a current asset, cash, or a current receivable with no corresponding ef- fect to a current liability. Increase in a long-term liability. Creating or increasing a loan, mortgage, debenture, or bond achieves this, and is an inflow that increases work- ing capital. Borrowing additional long-term debt will create an increase in a current asset, cash, or a current receivable with no corresponding ef- fect to a current liability. The issuance of stock. Equity financing creates an inflow that increases working capital. In a proprietorship or partnership (an unincorporated company), stock is not issued; however, any investment by the owner(s) increases their equity capital accounts. The sale of equity or receipt of an owner’s investment will create an increase in a current asset, cash, or a current receivable with no corresponding effect on a current liability. OUTFLOWS — USES OF WORKING CAPITAL The following are the major outflows or uses that will decrease working capital: Loss from operations. Just as accrual net income is an increase in work- ing capital, an accrual net loss is a decrease in working capital. When a loss occurs, operating expenses have exceeded sales revenue, which de- creases working capital. Just as net income has to be adjusted for non- cash expenditures (depreciation, franchise, goodwill, write-downs, or amortization), the net loss is similarly adjusted. The net loss may be re- duced by any noncash expense shown on the income statement. Purchase of a long-term or other noncurrent asset. This would include land, building, furniture, equipment, or other investment that is an out- flow that decreases working capital. The cost of another noncurrent as- set, such as the prepayment of a long-term franchise fee, is also an outflow that decreases working capital. Payment of long-term liabilities. Any payment reducing the principal amount owed on a long-term (noncurrent) liability is an outflow that de- creases working capital. Redemption of stock. Any previously issued stock repurchased by the issuing company is called treasury stock, an outflow that decreases work- ing capital. 430 CHAPTER 10 CASH FLOWS AND WORKING CAPITAL ANALYSIS 4259_Jagels_10.qxd 4/14/03 11:04 AM Page 430 Payment of cash dividends. Previously declared, these are payable obli- gations, payment of which is an outflow that decreases working capital. In a nonincorporated company, a partnership, or proprietorship, any cash or other current asset withdrawals made by the owner(s) are reductions of their capital investment and are treated as an outflow, decrease of work- ing capital. The major activities that create sources that increase working capital (WC) and uses that will decrease working capital are summarized in the following: ANALYSIS OF CHANGES TO WORKING CAPITAL 431 Effect Sources Activity Uses Effect Increase WC ϭ Net Income Income or Loss ➞ Net Loss ϭ Decrease WC Increase WC ϭ Sale of Long-term Assets ➞ Purchase ϭ Decrease WC assets (or Other Asset) assets Increase WC ϭ Borrowed Long-term Liabilities ➞ Payment ϭ Decrease WC Increase WC ϭ Sold equity Ownership Equity ➞ Buy back ϭ Decrease WC (No opposite) ϭ Cash Dividends ➞ Payment ϭ Decrease WC ➞ ➞ ➞ ➞ STATEMENT USES A statement of changes to working capital is discussed first, followed by a state- ment of changes to individual working capital accounts. Let us consider the fol- lowing three situations presented in Exhibits 10.8, 10.9, and 10.10, concerning three different restaurants. Each restaurant began the operating year with $88,000 of working capital and ended the year with $100,000 of working capital; each restaurant increased working capital by $12,000. Each restaurant wants to bor- row $15,000 for three years with interest from the same bank. Information is readily available from their balance sheets, but it does not clearly identify the causes of the increase to working capital without a statement of working capi- tal inflow sources and outflow uses. The statement, when completed, will clearly identify each source inflow and use outflow of working capital. We will assume the banker compiled the same information. Restaurant A: Exhibit 10.8 The information regarding Restaurant A shows it generated sufficient work- ing capital from operations to pay out $8,000 in dividends. If you assume that the restaurant’s business will stay relatively the same over the next three years, it appears there is a low risk to the bank that is lending the restaurant money. The restaurant should be able to pay the interest and repay $5,000 a year to re- tire the loan. 4259_Jagels_10.qxd 4/14/03 11:04 AM Page 431 Restaurant B: Exhibit 10.9 Based on this information, the banker would consider the restaurant to be a moderate to high risk. While this restaurant also paid out cash dividends of $8,000, it already has a loan outstanding that requires a payment of $5,000 per year plus interest. If a new loan were granted, it might be questionable whether the restaurant could make and sustain yearly payments of $10,000 per year plus interest. A modest decline in net income over the next few years would decrease the working capital and potentially create difficulties for the restaurant in meet- ing its debt obligations and paying dividends. If this should occur, the risk in- volved would grow in proportion to the reduction of net income. Thus, there is high risk to the lender. Restaurant C: Exhibit 10.10 In this last situation, it would be an extremely high risk for the bank to loan this restaurant $15,000. A net income of $4,000 was apparently adequate to meet the current debt payment of $4,000, but not the interest. Payment of the divi- dend in this situation is in itself questionable. If net income remains at this level, the restaurant will not meet its current debt obligation, let alone pay dividends. Although the Restaurant C illustration is somewhat extreme, it does point out the way in which information provided by the statement of changes to work- ing capital can be of value in decision making. 432 CHAPTER 10 CASH FLOWS AND WORKING CAPITAL ANALYSIS Inflows of Working Capital Net income (after tax) $20,000 Loan payable (repayable over 4 years with interest) ᎏ 2 ᎏ 0 ᎏ , ᎏ 0 ᎏ 0 ᎏ 0 ᎏ $40,000 Outflows of Working Capital Investment in new building $20,000 Cash Dividends paid ᎏᎏ 8 ᎏ , ᎏ 0 ᎏ 0 ᎏ 0 ᎏ ( ᎏ 2 ᎏ 8 ᎏ , ᎏ 0 ᎏ 0 ᎏ 0 ᎏ ) Net Change, Increase to Working Capital $ ᎏ ᎏ 1 ᎏ ᎏ 2 ᎏ ᎏ , ᎏ ᎏ 0 ᎏ ᎏ 0 ᎏ ᎏ 0 ᎏ ᎏ EXHIBIT 10.9 Restaurant B Statement of Changes,Working Capital for the Year Ended December 31,0006 Inflows of Working Capital Net income (after tax) $20,000 Outflows of Working Capital Cash dividends declared and paid to stockholders ( ᎏᎏ 8 ᎏ , ᎏ 0 ᎏ 0 ᎏ 0 ᎏ ) Net Change, Increase to Working Capital $ ᎏ ᎏ 1 ᎏ ᎏ 2 ᎏ ᎏ , ᎏ ᎏ 0 ᎏ ᎏ 0 ᎏ ᎏ 0 ᎏ ᎏ EXHIBIT 10.8 Restaurant A Statement of Changes,Working Capital for the Year Ended December 31,0006 4259_Jagels_10.qxd 4/14/03 11:05 AM Page 432 TRANSACTIONS AFFECTING ONLY CURRENT ACCOUNTS Note that all the items discussed and listed earlier under inflows or outflows of working capital affected a current asset or current liability account and a non- current account. Transactions causing inflows and/or outflows of working cap- ital identify the cause of such changes in net working capital. However, it does not show specific details of changes in individual current asset or current lia- bility accounts. Transactions affecting only current asset or current liability ac- counts will not appear on the statement of changes to working capital. For example, consider the following partial balance sheet information: Current Assets Current Liabilities Cash $12,000 Accounts payable $10,800 Credit card receivables 800 Interest payable 200 Accounts receivable 2,000 Bank loan payable 4,800 Inventories (for resale) ᎏᎏ 8 ᎏ , ᎏ 0 ᎏ 0 ᎏ 0 ᎏ ᎏᎏᎏᎏᎏᎏ Total $ ᎏ ᎏ 2 ᎏ ᎏ 2 ᎏ ᎏ , ᎏ ᎏ 8 ᎏ ᎏ 0 ᎏ ᎏ 0 ᎏ ᎏ $ ᎏ ᎏ 1 ᎏ ᎏ 5 ᎏ ᎏ , ᎏ ᎏ 8 ᎏ ᎏ 0 ᎏ ᎏ 0 ᎏ ᎏ The working capital, CA Ϫ CL ϭ $22,800 Ϫ $15,800 ϭ $7,000. If $4,500 cash were paid on accounts payable, only two current accounts would be af- fected. A new partial balance sheet would be: Current Assets Current Liabilities Cash $ 7,500 Accounts payable $ 6,300 Credit card receivables 800 Interest payable 200 Accounts receivable 2,000 Bank loan payable 4,800 Inventories (for resale) ᎏᎏ 8 ᎏ , ᎏ 0 ᎏ 0 ᎏ 0 ᎏ ᎏᎏᎏᎏᎏᎏ Total $ ᎏ ᎏ 1 ᎏ ᎏ 8 ᎏ ᎏ , ᎏ ᎏ 3 ᎏ ᎏ 0 ᎏ ᎏ 0 ᎏ ᎏ $ ᎏ ᎏ 1 ᎏ ᎏ 1 ᎏ ᎏ , ᎏ ᎏ 3 ᎏ ᎏ 0 ᎏ ᎏ 0 ᎏ ᎏ ANALYSIS OF CHANGES TO WORKING CAPITAL 433 Inflows of Working Capital Net income (after taxes) $ 4,000 Loans payable (investor, repayable over 4 years with interest) ᎏ 1 ᎏ 6 ᎏ , ᎏ 0 ᎏ 0 ᎏ 0 ᎏ $20,000 Outflows of Working Capital Dividends paid to stockholders ( ᎏᎏ 8 ᎏ , ᎏ 0 ᎏ 0 ᎏ 0 ᎏ ) Net Change, Increase to Working Capital $ ᎏ ᎏ 1 ᎏ ᎏ 2 ᎏ ᎏ , ᎏ ᎏ 0 ᎏ ᎏ 0 ᎏ ᎏ 0 ᎏ ᎏ EXHIBIT 10.10 Restaurant C Statement of Changes,Working Capital for the Year Ended December 31,0006 4259_Jagels_10.qxd 4/14/03 11:05 AM Page 433 Since the example transaction affected only two current accounts, current assets and current liabilities, working capital will not change. It is still $7,000 ($18,300 Ϫ $11,300). This type of simple transaction affects only two current accounts; both accounts are changed by the same amount. If cash is received in payment of a receivable, a transaction is created that causes an exchange of one current asset for another current asset; no change to total current assets occurs. The purchase of a current asset on credit affects only two current accounts for the same dollar amount. As a result of these examples, we will not be concerned with changes between individual current asset and current liability accounts. The statement of changes to working capital views only the effects of trans- actions that will change total current assets and/or total current liabilities. To complete a statement of changes to working capital, we require the following information: A balance sheet at the close of the previous accounting period A balance sheet at the close of the current accounting period An income statement for the current period A statement of retained earnings at the close of the current period or de- tailed information about retained earnings on the balance sheet at the close of the current period Any other information not fully disclosed (e.g., information about the purchase or sale of individual long-term assets or details about long-term liabilities or share transactions) COMPLETION OF A STATEMENT OF CHANGES TO WORKING CAPITAL To illustrate how a statement of changes to working capital can be devel- oped, we will refer to the comparative balance sheets in Exhibit 10.11, includ- ing some information regarding retained earnings. As we move through the discussion, we will also reference Exhibit 10.12, a condensed income statement and, finally, look at Exhibit 10.13, a statement of retained earnings. The use of working papers to gather the necessary information defining the changes to working capital is the most accurate proof of working capital eval- uation, although working papers are not an absolute requirement. The easiest method is to evaluate the comparative balance sheets, the income statement, and the statement of retained earnings to identify relevant items as an inflow (in- crease) or an outflow (decrease) of working capital. 434 CHAPTER 10 CASH FLOWS AND WORKING CAPITAL ANALYSIS 4259_Jagels_10.qxd 4/14/03 11:05 AM Page 434 CURRENT ACCOUNT INFORMATION, COMPARATIVE BALANCE SHEETS From Exhibit 10.11, the first step is to find the change in working capital from the previous balance sheet ending date to the current balance sheet ending date (CA Ϫ CL ϭ WC): COMPLETION OF A STATEMENT OF CHANGES TO WORKING CAPITAL 435 Year ending 0007: Current assets Ϫ Current liabilities ϭ Working capital $24,000 Ϫ $17,000 ϭ $ ᎏ ᎏ 7 ᎏ ᎏ , ᎏ ᎏ 0 ᎏ ᎏ 0 ᎏ ᎏ 0 ᎏ ᎏ Year ending 0006: Current assets Ϫ Current liabilities ϭ Working capital $18,000 Ϫ $15,000 ϭ $ ᎏ ᎏ 3 ᎏ ᎏ , ᎏ ᎏ 0 ᎏ ᎏ 0 ᎏ ᎏ 0 ᎏ ᎏ Working capital 0007 Ϫ Working capital 0006 ϭ Net change to working capital $7,000 Ϫ $3,000 ϭ $ ᎏ ᎏ 4 ᎏ ᎏ , ᎏ ᎏ 0 ᎏ ᎏ 0 ᎏ ᎏ 0 ᎏ ᎏ ᎏ ᎏ I ᎏ ᎏ n ᎏ ᎏ c ᎏ ᎏ r ᎏ ᎏ e ᎏ ᎏ a ᎏ ᎏ s ᎏ ᎏ e ᎏ ᎏ Working capital has an increase of $4,000. This figure must agree with the change in working capital that appears as the difference between inflow increases and outflow decreases on the statement of changes to working capital. Having identified the change in working capital, the current asset and current liability sections of our comparative balance sheets can be ignored. Only infor- mation from noncurrent sections of the comparative balance sheets in Exhibit 10.11, the income statement in Exhibit 10.12, and the statement of retained earnings in Exhibit 10.13 will be required to complete the changes in working capital. NONCURRENT BALANCE SHEET INFORMATION As already stated, we do not need to consider the current balance sheet accounts. The second step is to evaluate the noncurrent assets and noncurrent liabilities. Noncurrent Assets The land account remained unchanged at $30,000 and the building account remained unchanged at $250,000 between year 0006 and year 0007. The furni- ture account increased by $1,000, and the equipment account increased $4,000 between year 0006 and year 0007. Since additional furniture and equipment were acquired during the year 0007 operating period, the total $5,000 increase to two noncurrent asset accounts resulted from the use of cash. Use, Outflow, decrease to working capital: purchase of furniture, $1,000, and equipment, $4,000. Total decrease to working capital ؍ $ ᎏ ᎏ 5 ᎏ ᎏ , ᎏ ᎏ 0 ᎏ ᎏ 0 ᎏ ᎏ 0 ᎏ ᎏ . 4259_Jagels_10.qxd 4/14/03 11:05 AM Page 435 436 CHAPTER 10 CASH FLOWS AND WORKING CAPITAL ANALYSIS Assets 12-31-0006 12-31-0007 Current Assets Cash $ 10,000 $ 12,000 Credit card receivables 2,000 2,000 Accounts receivable 3,000 6,000 Inventories ᎏᎏᎏ 3 ᎏ , ᎏ 0 ᎏ 0 ᎏ 0 ᎏ ᎏᎏᎏ 4 ᎏ , ᎏ 0 ᎏ 0 ᎏ 0 ᎏ Total Current Assets $ 18,000 $ 24,000 Fixed Assets Land $ 30,000 $ 30,000 Building 250,000 250,000 Equipment 28,000 32,000 Furniture ᎏᎏᎏ 7 ᎏ , ᎏ 0 ᎏ 0 ᎏ 0 ᎏ ᎏᎏᎏ 8 ᎏ , ᎏ 0 ᎏ 0 ᎏ 0 ᎏ Total $315,000 $320,000 Less: Accum. deprecation ( ᎏᎏ 1 ᎏ 5 ᎏ , ᎏ 0 ᎏ 0 ᎏ 0 ᎏ )( ᎏᎏ 2 ᎏ 7 ᎏ , ᎏ 0 ᎏ 0 ᎏ 0 ᎏ ) Total Fixed Assets ᎏ 3 ᎏ 0 ᎏ 0 ᎏ , ᎏ 0 ᎏ 0 ᎏ 0 ᎏᎏ 2 ᎏ 9 ᎏ 3 ᎏ , ᎏ 0 ᎏ 0 ᎏ 0 ᎏ Total Assets $ ᎏ ᎏ 3 ᎏ ᎏ 1 ᎏ ᎏ 8 ᎏ ᎏ , ᎏ ᎏ 0 ᎏ ᎏ 0 ᎏ ᎏ 0 ᎏ ᎏ $ ᎏ ᎏ 3 ᎏ ᎏ 1 ᎏ ᎏ 7 ᎏ ᎏ , ᎏ ᎏ 0 ᎏ ᎏ 0 ᎏ ᎏ 0 ᎏ ᎏ Liabilities & Stockholders’ Equity Current Liabilities Accounts payable $ 4,000 $ 5,000 Accrued expenses -0- 4,000 Bank loan ᎏᎏ 1 ᎏ 1 ᎏ , ᎏ 0 ᎏ 0 ᎏ 0 ᎏ ᎏᎏᎏ 8 ᎏ , ᎏ 0 ᎏ 0 ᎏ 0 ᎏ Total Current Liabilities $ 15,000 $ 17,000 Long-term Liability Mortgage payable $185,000 $175,000 Stockholders’ Equity Capital stock $100,000 $105,000 Retained earnings ᎏᎏ 1 ᎏ 8 ᎏ , ᎏ 0 ᎏ 0 ᎏ 0 ᎏᎏᎏ 2 ᎏ 0 ᎏ , ᎏ 0 ᎏ 0 ᎏ 0 ᎏ Total Stockholders’ Equity $ ᎏ 1 ᎏ 1 ᎏ 8 ᎏ , ᎏ 0 ᎏ 0 ᎏ 0 ᎏ $ ᎏ 1 ᎏ 2 ᎏ 5 ᎏ , ᎏ 0 ᎏ 0 ᎏ 0 ᎏ Total Liabilities & Stockholders’ Equity $ ᎏ ᎏ 3 ᎏ ᎏ 1 ᎏ ᎏ 8 ᎏ ᎏ , ᎏ ᎏ 0 ᎏ ᎏ 0 ᎏ ᎏ 0 ᎏ ᎏ $ ᎏ ᎏ 3 ᎏ ᎏ 1 ᎏ ᎏ 7 ᎏ ᎏ , ᎏ ᎏ 0 ᎏ ᎏ 0 ᎏ ᎏ 0 ᎏ ᎏ EXHIBIT 10.11 Comparative Balance Sheets for Years 0006 and 0007 Sales revenue $100,000 Operating expense ( ᎏᎏ 8 ᎏ 2 ᎏ , ᎏ 0 ᎏ 0 ᎏ 0 ᎏ ) Income before depreciation expense $ 18,000 Depreciation expense ( ᎏᎏ 1 ᎏ 2 ᎏ , ᎏ 0 ᎏ 0 ᎏ 0 ᎏ ) Net income $ ᎏ ᎏ ᎏ ᎏ ᎏ ᎏ 6 ᎏ ᎏ , ᎏ ᎏ 0 ᎏ ᎏ 0 ᎏ ᎏ 0 ᎏ ᎏ EXHIBIT 10.12 Condensed Income Statement for the Year Ended December 31, 0007 4259_Jagels_10.qxd 4/14/03 11:05 AM Page 436 In addition, the contra asset account, accumulated depreciation, increased by $12,000 during the 0007 operating year, because of a noncash depreciation expense transaction. The effect of increasing accumulated depreciation is the re- duction of the book value (carrying value) of related long-lived capital assets, which does not affect working capital and is ignored. Noncurrent Liabilities The long-term liability, mortgage payable, decreased during year 0007 by $10,000. The reduction of the long-term liability was caused by an outflow of current assets, specifically cash. Use, Outflow, decrease to working capital: mortgage payable reduction ؍ $ ᎏ ᎏ 1 ᎏ ᎏ 0 ᎏ ᎏ , ᎏ ᎏ 0 ᎏ ᎏ 0 ᎏ ᎏ 0 ᎏ ᎏ Stockholders’ Equity In the final step, the capital stock account increased during year 0007 from $100,000 to $105,000. The increase to the capital stock account shows that $5,000 of additional capital stock was issued for cash, which is an inflow of a current asset. Always assume stock is issued for cash unless specifically noted in the accounting records or as a footnote to the balance sheet. Source, Inflow, increase, to working capital: capital stock issued (sold) ؍ $ ᎏ ᎏ 5 ᎏ ᎏ , ᎏ ᎏ 0 ᎏ ᎏ 0 ᎏ ᎏ 0 ᎏ ᎏ Retained Earnings Retained earnings changed from year 0006 to year 0007. For details con- cerning this change, we need to refer to the statement of retained earnings (Ex- hibit 10.13) which we will do after we have looked at the income statement (Exhibit 10.12). The income statement reports net income of $6,000, which is treated as an inflow, increase to working capital. In arriving at net income, depreciation was COMPLETION OF A STATEMENT OF CHANGES TO WORKING CAPITAL 437 Retained earnings January 1, 0007 $18,000 Add: Net income for year ᎏᎏ 6 ᎏ , ᎏ 0 ᎏ 0 ᎏ 0 ᎏ Subtotal $24,000 Less: Dividends declared and paid ( ᎏᎏ 4 ᎏ , ᎏ 0 ᎏ 0 ᎏ 0 ᎏ ) Retained earnings December 31, 0007 $ ᎏ ᎏ 2 ᎏ ᎏ 0 ᎏ ᎏ , ᎏ ᎏ 0 ᎏ ᎏ 0 ᎏ ᎏ 0 ᎏ ᎏ EXHIBIT 10.13 Statement of Retained Earnings for the Year Ended December 31, 0007 4259_Jagels_10.qxd 4/14/03 11:05 AM Page 437 [...]... Equity $ 41,903 17,502 5 ,83 4 $ 6,352 2,195 ᎏᎏᎏᎏᎏᎏᎏᎏ $171,524 ( 27,504) ᎏᎏᎏᎏᎏᎏᎏᎏ $ 53,596 ( 12,744) ᎏᎏᎏᎏᎏᎏᎏᎏ 8, 817 2,917 13,090 42,741 ᎏᎏᎏᎏᎏᎏᎏᎏ 8, 547 2,176 ᎏᎏᎏᎏᎏᎏᎏᎏ $ 75,962 $144,020 40 ,85 2 ᎏᎏᎏᎏᎏᎏᎏᎏ 184 ,87 2 ᎏᎏᎏᎏᎏᎏᎏᎏ $260 ,83 4 ᎏᎏᎏᎏᎏᎏᎏᎏ $ $ 67,565 82 ,517 ᎏᎏᎏᎏᎏᎏᎏᎏ $150, 082 $ 30,000 $ 34,342 46,410 ᎏᎏᎏᎏᎏᎏᎏᎏ 80 ,752 ᎏᎏᎏᎏᎏᎏᎏᎏ $110,752 ᎏᎏᎏᎏᎏᎏᎏᎏ $260 ,83 4 ᎏᎏᎏᎏᎏᎏᎏᎏ 455 C H A P T E R CASH MANAGEMENT I N T R O D U... tax) Income tax Net income $204,900 ( 173 ,80 0) ᎏᎏᎏᎏᎏᎏᎏᎏ 31,100 ( 8, 300) ( 3,700) ᎏᎏᎏᎏᎏᎏᎏᎏ $ 19,100 ( 10 ,80 0) ᎏᎏᎏᎏᎏᎏᎏᎏ $ 8, 300 ( 1,500) ᎏᎏᎏᎏᎏᎏᎏᎏ $ 6 ,80 0 ᎏᎏᎏᎏᎏᎏᎏᎏ Statement of Retained Earnings for Year Ended December 31, 2005 Retained earnings, January 1, 2005 Add: Net income for year Subtotal Deduct: Dividends paid Retained earnings December 31, 2005 $ 22 ,80 0 6 ,80 0 ᎏᎏᎏᎏᎏᎏᎏᎏ $ 29,600 ( 3,200) ᎏᎏᎏᎏᎏᎏᎏᎏ... Accounts payable Income tax payable Long-term loan Common stock Retained earnings Total Yr 2005 $14 ,80 0 8, 300 7,900 15,500 ( 3,500) ᎏᎏᎏᎏᎏᎏᎏ $43,000 ᎏᎏᎏᎏᎏᎏᎏ $15,600 7,700 9,700 19,500 ( 4,500) ᎏᎏᎏᎏᎏᎏᎏ $ 48, 000 ᎏᎏᎏᎏᎏᎏᎏ $ 5,600 1,400 25 ,80 0 4,200 6,000 ᎏᎏᎏᎏᎏᎏᎏ $43,000 ᎏᎏᎏᎏᎏᎏᎏ $ 7 ,80 0 200 27 ,80 0 5,200 7,000 ᎏᎏᎏᎏᎏᎏᎏ $ 48, 000 ᎏᎏᎏᎏᎏᎏᎏ 449 450 CHAPTER 10 CASH FLOWS AND WORKING CAPITAL ANALYSIS a Net income for year... Assets Building Accumulated depreciation, building Equipment Accumulated depreciation, equipment Total Non-current, Fixed Assets Total Assets 12-31-2005 $ 8, 600 19 ,80 0 6,100 1,200 ᎏᎏᎏᎏᎏᎏᎏ $35,700 $ 15,000 15 ,80 0 6,300 1,700 ᎏᎏᎏᎏᎏᎏᎏᎏ $ 38, 800 -0-031,700 ( 5 ,80 0) ᎏᎏᎏᎏᎏᎏᎏ $25,900 ᎏᎏᎏᎏᎏᎏᎏ $61,600 ᎏᎏᎏᎏᎏᎏᎏ 150,000 7,500) 33,900 ( 6,200) ᎏᎏᎏᎏᎏᎏᎏᎏ $170,200 ᎏᎏᎏᎏᎏᎏᎏᎏ $209,000 ᎏᎏᎏᎏᎏᎏᎏᎏ ( PROBLEMS 12-31-2004 Liabilities... mortgage on building Common stock Retained earnings Total Liabilities and Stockholders’ Equity 12-31-2005 $ 8, 800 17,200 2,100 20,000 50,600 ( 30,000) ᎏᎏᎏᎏᎏᎏᎏ $ 68, 700 ᎏᎏᎏᎏᎏᎏᎏ $ -030,600 5,500 20,000 100,600 ( 40,000) ᎏᎏᎏᎏᎏᎏᎏᎏ $116,700 ᎏᎏᎏᎏᎏᎏᎏᎏ $ 6,700 -0-02,000 60,000 ᎏᎏᎏᎏᎏᎏᎏ $ 68, 700 ᎏᎏᎏᎏᎏᎏᎏ $ 12 ,80 0 7,900 30,000 2,000 64,000 ᎏᎏᎏᎏᎏᎏᎏᎏ $116,700 ᎏᎏᎏᎏᎏᎏᎏᎏ 453 454 CHAPTER 10 CASH FLOWS AND WORKING CAPITAL... $110,000 93,200 ᎏᎏᎏᎏᎏᎏᎏᎏ $ 16 ,80 0 ᎏᎏᎏᎏᎏᎏᎏᎏ The statement of retained earnings for year 2005 shows: Retained earnings December 31, 2004 Net income for Year 2005 Subtotal Cash dividends Retained earnings December 31, 2005 $60,000 16 ,80 0 ᎏᎏᎏᎏᎏᎏᎏ 76 ,80 0 ( 12 ,80 0) ᎏᎏᎏᎏᎏᎏᎏ $64,000 ᎏᎏᎏᎏᎏᎏᎏ The owner cannot understand why he has $64,000 of retained earnings and a net income of $16 ,80 0 after tax from year 2005... stock Retained earnings Total Stockholders’ Equity Total Liabilities and Stockholders’ Equity 12-31-2005 $21,200 7,500 -0ᎏᎏᎏᎏᎏᎏᎏᎏ $ 28, 700 $ 25,400 8, 800 7,100 ᎏᎏᎏᎏᎏᎏᎏᎏ $ 41,300 -0- $132,900 $ 3,000 29,900 ᎏᎏᎏᎏᎏᎏᎏ $32,900 ᎏᎏᎏᎏᎏᎏᎏ $61,600 ᎏᎏᎏᎏᎏᎏᎏ $ 13,000 21 ,80 0 ᎏᎏᎏᎏᎏᎏᎏᎏ $ 34 ,80 0 ᎏᎏᎏᎏᎏᎏᎏᎏ $209,000 ᎏᎏᎏᎏᎏᎏᎏᎏ Calculate the changes in working capital and prepare the company’s statement of sources (inflows)... A hotel provided the following information for year 2006: The cash flow from operating activities was $143,200, average current liabilities were $ 68, 300, average total liabilities were $82 3,300, and total revenue for the year was $2,406 ,80 0 Interest was $ 68, 000 Calculate the following ratios: a The cash flow from operating activities to current liabilities ratio b The cash flow for operating activities... 3,000 8, 000 1,200 ᎏᎏᎏᎏᎏᎏᎏᎏ $ 22,200 ᎏᎏᎏᎏᎏᎏᎏᎏ $ 5,200 5,500 700 3,600 7,000 1,500 ᎏᎏᎏᎏᎏᎏᎏᎏ $ 23,500 ᎏᎏᎏᎏᎏᎏᎏᎏ $ 30,000 150,000 ( 41,900) 22,700 ( 15,400) ᎏᎏᎏᎏᎏᎏᎏᎏ $145,400 ᎏᎏᎏᎏᎏᎏᎏᎏ $167,600 ᎏᎏᎏᎏᎏᎏᎏᎏ $ 30,000 150,000 ( 50,200) 25,400 ( 19,100) ᎏᎏᎏᎏᎏᎏᎏᎏ $136,100 ᎏᎏᎏᎏᎏᎏᎏᎏ $159,600 ᎏᎏᎏᎏᎏᎏᎏᎏ $ 6,900 1,400 2,000 11,500 ᎏᎏᎏᎏᎏᎏᎏᎏ $ 21 ,80 0 $ 7,000 1,700 1,500 10,400 ᎏᎏᎏᎏᎏᎏᎏᎏ $ 20,600 100,000 ᎏᎏᎏᎏᎏᎏᎏᎏ $121 ,80 0 89 ,600... credit card receivables, collections [$30,000 ؋ 35% ؋ 86 %] Previous month credit card receivables, collections [$ 28, 000 ؋ 35% ؋ 14%] Previous month accounts receivable, collections [$ 28, 000 ؋ 5%] Cash Disbursements Current month cash food inventory purchases, $12,000 ؋ 25% ‫000,3$ ؍‬ Accounts payable food purchases, previous month, $11,000 ؋ 75% ‫052 ,8 ؍‬ Payroll and related expenses, 100% cash ‫000,9 . $10 ,80 0 Credit card receivables 80 0 Interest payable 200 Accounts receivable 2,000 Bank loan payable 4 ,80 0 Inventories (for resale) ᎏᎏ 8 ᎏ , ᎏ 0 ᎏ 0 ᎏ 0 ᎏ ᎏᎏᎏᎏᎏᎏ Total $ ᎏ ᎏ 2 ᎏ ᎏ 2 ᎏ ᎏ , ᎏ ᎏ 8 ᎏ ᎏ 0 ᎏ ᎏ 0 ᎏ ᎏ $ ᎏ ᎏ 1 ᎏ ᎏ 5 ᎏ ᎏ , ᎏ ᎏ 8 ᎏ ᎏ 0 ᎏ ᎏ 0 ᎏ ᎏ The. 6,300 Credit card receivables 80 0 Interest payable 200 Accounts receivable 2,000 Bank loan payable 4 ,80 0 Inventories (for resale) ᎏᎏ 8 ᎏ , ᎏ 0 ᎏ 0 ᎏ 0 ᎏ ᎏᎏᎏᎏᎏᎏ Total $ ᎏ ᎏ 1 ᎏ ᎏ 8 ᎏ ᎏ , ᎏ ᎏ 3 ᎏ ᎏ 0 ᎏ ᎏ 0 ᎏ ᎏ $ ᎏ ᎏ 1 ᎏ ᎏ 1 ᎏ ᎏ , ᎏ ᎏ 3 ᎏ ᎏ 0 ᎏ ᎏ 0 ᎏ ᎏ ANALYSIS. $143,200, average current liabilities were $ 68, 300, average total liabilities were $82 3,300, and total revenue for the year was $2,406 ,80 0. Interest was $ 68, 000. Calculate the fol- lowing ratios: a.