Managerial Finance Assignment: Cash Flow and Financial Statements

This document presents a detailed solution to a Managerial Finance assignment. The solution begins with the calculation of Thorold Umbrella Corp.'s net income and operating cash flow for 2015, considering sales, costs, depreciation, interest, and tax rates. It then moves on to analyze Barrie Enterprises' financial statements for 2014 and 2015, calculating owner's equity, changes in net working capital, and the value of fixed assets sold. Finally, it computes the cash flow from assets, cash flow to creditors, and new borrowing, providing a comprehensive analysis of the company's financial performance and cash flow dynamics. The assignment showcases key concepts in financial analysis and statement interpretation.

MANAGERIAL FINANCE
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Question 1
a) Considering the data provided, the computation of Thorold’s net income for 2015 is
carried out below.
It is evident from above table, that the net income for Thorold for 2015 is -$95,000 or a loss
of $95,000.
b) The formula for operating cash flow (OCF) computation is shown below.
OCF = EBIT + Depreciation – Tax = -10,000 + 140,000 – 0 = $130,000
c) The results obtained from part (a) and part (b) may seem to be contradictory considering a
loss in net income on one hand and a healthy operating cash inflow. However, this can be
explained on account of depreciation which is essentially a non-cash charge that is used
for income computation. However, with regards to computation of operating cash flow
adjustment is made for depreciation as it does not represent any cash inflow or outflow.
Question 2
(a) Owner’s equity for 2011 and 2012
For year 2014
Total assets = Current asset + Net fixed asset = 914 +3767 = $4681
Total liabilities = Current liabilities + Long term debt = 365 +1991 = $2356
Owner’s equity = Total assets - Total liabilities = 4681 – 2356 = $2325
For year 2015
Total assets = Current asset + Net fixed asset = 990+4536 = $5526
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Total liabilities = Current liabilities + Long term debt = 410+2117 = $2527
Owner’s equity = Total assets - Total liabilities = 5526-2527 = $2999
(b) Change in the net working capital for the year 2015
Net working capital (2014) = Current asset – Current liabilities = 914-365 = $549
Net working capital (2015) = Current asset – Current liabilities = 990-410 = $580
Change in net working capital (NWC) = 580-549 = $31
(c) Tax rate = 35%
Net capital spending =Net fixed assets 2015 – Net fixed assets 2014 + Depreciation
Net capital spending = 4536 – 3767 +1033 = 1802
Now, net capital spending = Fixed assets bought – Fixed assets sold
1802 = 1890 - Fixed assets sold
Fixed assets sold = 1890 – 1802 = $88
Hence, $88 fixed assets sold by Barrie Enterprises.
Cash flow from assets
EBIT = Sales- Cost – Depreciation = 11592 – 5405 – 1033 = $5154
EBT = EBIT – Interest = 5154 – 294 = $4860
Taxes = EBT * 35% = 4860 * 0.35 = $1701
Operating cash flow = EBIT + Depreciation -Taxes = 5154 + 1033 – 1701 = $4486
Cash flow from assets = Operating cash flow – Change in net working capital - net capital
spending = 4486- 31 – 1802 = $2653
Thus, cash flow from assets would be $2653.
(d) New long-term debt = $378
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Net new borrowing = Long term debt (2015) - Long term debt (2014) = 2117 – 1991 = $126
Cash flow to creditors = Interest – Net new long-term debt = 294 – 126 = $168
Net new borrowing = Long term debt issued – Debt retired
Now,
Debt retired = Long term debt issued - Net new borrowing = 378 -126 = $252
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