4/16/2010

Chapter 2. 2-14

a. Cumberland Industries' most recent sales were $455,000,000; operating costs (excluding
depreciation) were equal to 85% of sales; net fixed assets were $67,000,000; depreciation amounted to
10% of net fixed assets; interest expenses were $8,550,000; the state-plus-federal corporate tax rate was
40% and Cumberland paid 25% of its net income out in dividends. Given this information, construct
Cumberland's income statement. Also calculate total dividends and the addition to retained earnings.

The input information required for the problem is outlined in the "Key Input Data" section below. Using this
data and the balance sheet above, we constructed the income statement shown below.

Key Input Data for Cumberland Industries 2010

(Thousands of dollars)
Sales Revenue $455,000
Expenses (excluding depreciation) as a percent of sales 85.0%
Net fixed assest $67,000
Depr. as a % of net fixed assets 10.0%
Tax rate 40.0%
Interest expense $8,550
Dividend Payout Ratio 25%

Cumberland Industries: Income Statement (Thousands of dollars) 2010

Sales
Operating costs excluding depreciation
EBITDA
Depreciation (Cumberland has no amortization charges)
EBIT
Interest expense
EBT
Taxes (40%)
Net income

Common dividends
Addition to retained earnings
b. Cumberland Industries' partial balance sheets are shown below. Cumberland issued $10,000,000 of
new common stock in the most recent year. Using this information and the results from part a, fill in the
missing values for common stock, retained earnings, total common equity, and total liabilities and
equity.

Dollar value of common stock issued (in thousands of dollars) $10,000

Cumberland Industries December 31 Balance Sheets

(in thousands of dollars)
2010 2009
Assets
Cash and cash equivalents $91,450 $74,625
Short-term investments 11,400 15,100
Accounts Receivable 108,470 85,527
Inventories 38,450 34,982
Total current assets $249,770 $210,234
 Net fixed assets 67,000 42,436
Total assets $316,770 $252,670

Liabilities and equity

Accounts payable $30,761 $23,109
Accruals 30,405 22,656
Notes payable 12,717 14,217
Total current liabilities $73,883 $59,982
Long-term debt 80,263 63,914
Total liabilities $154,146 $123,896
Common stock $90,000
Retained earnings 38,774
Total common equity $128,774
Total liabilities and equity $252,670

Check for balancing (this should be zero):

c. Construct the statement of cash flows for the most recent year.

Statement of Cash Flows

(in thousands of dollars)

Operating Activities
Net Income
Adjustments:
Noncash adjustment:
Depreciation
Due to changes in working capital:
Due to change in accounts receivable
Due to change in inventories
Due to change in accounts payable
Due to change in accruals
Net cash provided (used) by operating activities

Investing Activities
Cash used to acquire gross fixed assets
Due to change in short-term investments
Net cash provided (used) by investing activities

Financing Activities
Due to change in notes payable
Due to change in long-term debt
Due to change in common stock
Payment of common dividends
Net cash provided (used) by financing activities

Net increase/decrease in cash

Add: Cash balance at the beginning of the year
Cash balance at the end of the year