Tutorial 3- Question
1. Cindy and Robert (Rob) (Rob) Castillo founded the Castillo Products Company in 2012. The company manufactures components for personal decision assistant (PDA) products and for other handCastillo Products Company’s ability held electronic products. Year 2012 proved to be a test of the Castillo to survive. However, sales increased rapidly in 2013 2013 and the firm reported reported a net income after taxes of $75,000. Depreciation expenses were $40,000 $40,000 in 2013. 2013. Following are the Castillo Products Company’s balance sheets for 2012 and 2013. CASTILLO PRODUCTS COMPANY 2012
Cash Accounts Receivables Inventories Total Current Assets Gross Fixed Assets Accumulated Depreciation Depreciati on Net Fixed Assets Total Assets Accounts Payable Accruals Bank Loan
Total Current Liabilities Long-Term Debt Common Stock ($.01 par) Additional Paid-in-Capital Retained Earnings Total Liabilities & Equity A. B. C. D.
$50,000 200,000 400,000 650,000 450,000 -100,000 350,000 $1,000,000 $130,000 50,000 90,000
270,000 300,000 150,000 200,000 80,000 $1,000,000 $1,000,000
2013
$20,000 280,000 500,000 800,000 540,000 -140,000 400,000 $1,200,000 $160,000 70,000 100,000
330,000 400,000 150,000 200,000 120,000 $1,200,000 $1,200,000
Calculate Castillo’s cash flow from operating activities for 2013. Calculate Castillo’s cash flow from investing activities for 2013. Calculate Castillo’s cash flow from financing activities for 2013.
Prepare a formal statement of cash flows for 2013 and identify the major cash inflows and outflows that were generated by the Castillo Company. E. Use your calculation results from Parts A and B above to determine whether Castillo was building or burning cash during 2013 and indicate the dollar amount of the cash build or burn. F. If Castillo had a net cash burn from operating and investing activities in 2013 divide the amount of burn by 12 12 to calculate an average monthly monthly burn amount. If the 2014 monthly monthly cash burn continues at the 2013 rate, indicate how long in months it will be before the firm runs out of cash if there t here are no changes in financing activities.
2. The Castillo Products Company described in Problem 6 had a very difficult operating year in 2012 resulting in a net loss of $65,000 on sales of $900,000. In 2013, sales jumped to $1,500,000 and a net profit after taxes was earned. The firm’s income statements are below.
CASTILLO PRODUCTS COMPANY
2012
Net Sales Cost of Goods Sold Gross Profit Marketing General & Administrative Depreciation EBIT Interest Earnings Before Taxes Income Taxes Net Income (Loss)
$900,000 -540,000 360,000 -90,000 -250,000 -40,000 -20,000 -45,000 -65,000 0 -$65,000
2013
$1,500,000 -900,000 600,000 -150,000 -250,000 -40,000 160,000 -60,000 100,000 -25,000* $75,000
*Includes tax loss carryforward from 2012.
A. Calculate each income statement item for 2012 as a percent of the 2012 sales level. Make the same calculations for 2013. Determine which cost or expense items varied directly with sales for the two-year period? B. Use the information in Part A to classify specific expense items as being either variable or fixed expenses. Then estimate Castillo’s EBDAT breakeven in terms of survival rev enues if interest expenses had remained at the 2012 level ($45,000) in 2013. C. Estimate the dollar amount of survival revenues actually needed by the Castillo Products Company to reach EBDAT breakeven in 2013 given that more debt was obtained and interest expenses increased to $60,000.
3. Salza Technology Corporation increased its sales from $375,000 in 2012 to $450,000 in year 2013 as is shown in the firm’s income sta tements presented below. LeAnn Sands, chief executive officer (CEO) and founder of the firm expressed concern that the cash account and the firm’s marketable securities declined substantially between 2012 and 2013. Salza’s complete balance sheets are als o
shown below. Ms. Sands is seeking your assistance in the preparation of a statement of cash flows for Salza Technology. SALZA TECHNOLOGY CORPORATION
Annual Income Statements (in $ Thousands) Net sales Less: Cost of goods sold Gross profit Less: Operating expenses Less: Depreciation Less: Interest Income before taxes Less: Income taxes Net income Cash dividends
2012
2013
$375 225 150 46 25 4 75 20 55
$450 270 180 46 30 4 100 30 70
$17
$20
Balance Sheets as of December 31 (in $ Thousands) 2012
Cash Accounts receivable Inventories Total current assets Gross fixed assets Less accumulated depreciation Net fixed assets Total assets Accounts payable Bank loan Accrued liabilities Total current liabilities Long-term debt Common stock Retained earnings Total liabilities and equity
$ 39 50 151 240 200 -95 105 $345 $ 30 20 10 60 15 85 185 $345
2013
$ 16 80 204 300 290 -125 165 $465 $ 45 27 23 95 15 120 235 $465
A. Prepare a statement of cash flows for 2013 for the Salza Technology Corporation. B. Provide a brief description of what happened in terms of cash flows (both inflows and outflows) for Salza between years 2012 and 2013. C. Use your calculations from Part A for cash flows from operating and investing activities to indicate the extent to which Salza was building or burning cash in 2013. D. Convert the 2013 annual cash build or cash burn to a monthly rate. If cash flow activities relating to operations and investing for 2013 continue into 2014, indicate: (1) how long it will be before Salza runs out of cash (if Salza is burning cash), or (2) the expected 2014 year-end cash account balance if Salza is building cash. Assume no changes in cash flows from financing activities in 2014 for calculation purposes.
4. LeAnn Sands wants to conduct operating breakeven analyses of the Salza Technology Corporation for year 2013. Income statement information is shown in Problem 3 above. For year 2038, the firm’s cost of goods sold is considered to be variable costs and operating expenses are considered to be fixed cash costs. Depreciation expenses in year 2013 also are expected to be fixed costs. Calculate Salza’s EBDAT breakeven in terms of survival revenues for year 2013. 5. LeAnn Sands has reason to believe that year 2014 will be a replication of year 2013 except that cost of goods sold are expected to be 65 percent of the estimated $450,000 in revenues. Other income statement relationships are expected to remain the same in year 2014 as they were in year 2013. Calculate the EBDAT breakeven point for 2014 for Salza in terms of survival revenues.
Refer to Problems 4 and 5 in the chapter involving the Salza Technology Corporation (see Problem 3 for the firm’s financial statements). A. Calculate Salza’s NOPAT breakeven in terms of NOPAT breakeven revenues for year 2013. B.
Calculate the NOPAT breakeven point for 2014 for Salza in terms of NOPAT breakeven revenues.
