Sample Problem 1
John, a junior accountant, just finished recording the company's draft financial statements
for the year. He presented his results to his boss who said, "Good job, but you forgot that
we purchased a new industrial compressor for $200,000 at the beginning of the year with
an 8-year straight line depreciation schedule". Assume the company's tax rate is 25%. After
John makes his correction,
Sample Problem 1 Question Increase/ (Decrease) $ Amount
1 Total expenses before tax will lnc/(dec) by:
2 Tax expense will inc/(dec) by:
3 Net Income will inc/(dec) by:
4 Cash on the B.S. at year end will inc/(dec) by:
5 Cash flow from operations will inc/(dec) by:
6 Cash flow for investments will inc/(dec) by:
7 Cash flow from financing will inc/(dec) by:
8 Total cash flow will inc/(dec) by:
Sample Problem 1
John, a junior accountant, just finished recording the company's draft financial statements
for the year. He presented his results to his boss who said, "Good job, but you forgot that
we purchased a new industrial compressor for $200,000 at the beginning of the year with
an 8-year straight line depreciation schedule". Assume the company's tax rate is 25%. After
John makes his correction,
Sample Problem 1 Answer Increase/ (Decrease) $ Amount
1 Total expenses before tax will lnc/(dec) by: Increase $25,000
2 Tax expense will inc/(dec) by: Decrease ($6,250)
3 Net Income will inc/(dec) by: Decrease ($18,750)
4 Cash on the B.S. at year end will inc/(dec) by: Decrease ($193,750)
5 Cash flow from operations will inc/(dec) by: Increase $6,250
6 Cash flow for investments will inc/(dec) by: Decrease ($200,000)
7 Cash flow from financing will inc/(dec) by: No Change $0
8 Total cash flow will inc/(dec) by: Decrease ($193,750)
$(193,750) = $(200,000) Equipment Purchase + $6,250 Tax Savings
Sample Problem 1 Balance Sheet Change
Change in Cash (∆) ($193,750)
Change in Other ST Assets (∆) $0
Change in Current Assets (∆) ($193,750)
Gross PP&E (∆) $200,000
Accumulated Depreciation (∆) ($25,000)
Net PP&E (∆) $175,000
Change in Long Term Assets (∆) $175,000
Change in Total Term Assets (∆) ($18,750)
Change in Short Term Liabilities (∆) $0
Change in Long Term Liabilities (∆) $0
Change in Common Stock (∆) $0
Change in Retained Earnings (∆) ($18,750)
Change in Total Owner's Equity (∆) ($18,750)
Change in Total Owner's Equity (∆) + Total Liabilities ($18,750)
Sample Problem 2
John, a junior accountant, just finished recording the company's draft financial
statements for the year. He presented his results to his boss who said, "Good job, but you
forgot the 7 year, $100,000, 8% loan we took out at the beginning of the year. It came
with a mandatory partial principal pay down of 10% of the original principal at the end of
each year. We also paid a $5,000 dividend to our shareholders this year. The rest of your
work looks great". Assume the company's tax rate is 25%. After John makes his
corrections,
Sample Problem 2 Question Increase/ (Decrease) $ Amount
1 Total expenses before tax will lnc/(dec) by:
2 Tax expense will inc/(dec) by:
3 Net Income will inc/(dec) by:
4 Cash on the B.S. at year end will inc/(dec) by:
5 Cash flow from operations will inc/(dec) by:
6 Cash flow for investments will inc/(dec) by:
7 Cash flow from financing will inc/(dec) by:
8 Total cash flow will inc/(dec) by:
Sample Problem 2
John, a junior accountant, just finished recording the company's draft financial
statements for the year. He presented his results to his boss who said, "Good job, but you
forgot the 7 year, $100,000, 8% loan we took out at the beginning of the year. It came
with a mandatory partial principal pay down of 10% of the original principal at the end of
each year. We also paid a $5,000 dividend to our shareholders this year. The rest of your
work looks great". Assume the company's tax rate is 25%. After John makes his
corrections,
Sample Problem 2 Answer Increase/ (Decrease) $ Amount
1 Total expenses before tax will lnc/(dec) by: Increase $8,000
2 Tax expense will inc/(dec) by: Decrease ($2,000)
3 Net Income will inc/(dec) by: Decrease ($6,000)
4 Cash on the B.S. at year end will inc/(dec) by: Increase $79,000
5 Cash flow from operations will inc/(dec) by: Decrease ($6,000)
6 Cash flow for investments will inc/(dec) by: No Change $0
7 Cash flow from financing will inc/(dec) by: Increase $85,000
8 Total cash flow will inc/(dec) by: Increase $79,000
$79,000=$100,000 financing -$10,000 pay down- $6,000 NI- $5,000 dividends
Balance Sheet
Sample Problem 2 Change
Change in Cash (∆) $79,000
Change in Other STA (∆) $0
Change in Current Assets (∆) $79,000
Gross PP&E (∆) $0
Accumulated Depreciation (∆) $0
Net PP&E (∆) $0
Change in Long Term Assets (∆) $0
Change in Total Term Assets (∆) $79,000
Change in Short Term Liabilities (∆) = Current Portion of LTD $10,000
Change in Other Short Term Liabilities (∆) $0
Change in Current Liabilities (∆) $10,000
Change in Long Term Liabilities (∆) = Remaining Balance at the End of the
year $80,000
Change in Long Term Liabilities (∆) $80,000
Change in Total Liabilities $90,000
Change in Common Stock (∆) $0
Change in Retained Earnings (∆) ($11,000)
Change in Total Owner's Equity (∆) ($11,000)
Change in Total Owner's Equity (∆) + Total Liabilities $79,000
