Question

A simplified hypothetical accounting income statement for XYZ Company is given below. Income Statement for XYZ Company, year ending 31 December 2002 $$ \begin{array}{lr} & \$ \text { millions } \\ \text { Sales } & 45,000 \\ \text { Cost of goods sold } & 14,000 \\ \text { Other expenses } & 350 \\ \text { Selling, general and administrative expenses } & 12,455 \\ \text { Depreciation } & \underline{2,500} \\ \text { Earnings before interest and taxes (EBIT) } & 15,695 \\ \text { Interest expense } & \underline{495} \\ \text { Taxable income } & 15,200 \\ \text { Tax payable @ 30\% } & \underline{4,560} \\ \text { Net income (after tax) } & 10,640 \end{array} $$ Further information: Sales: It is reasonable to assume that approximately $50 \%$ of sales are on credit. The credit terms are 90 days. For simplicity, assume all credit customers take the full 90 days to pay. Cost of goods sold: In addition to the cost of goods sold given in the table, inventories increased $\$ 60$ million in this year. Selling, general, administrative and other expenses: The XYZ Company has 90 days to pay on all accounts and the company takes full advantage of this facility. (a) What is the difference between the 'sales' in this financial statement and in what would be recorded as a project's cash flow? What is the cash inflow from sales for XYZ? (b) How is the 'cost of goods sold' recorded in financial statements? Can the cost of goods sold and its cash flow be easily reconciled? Is it really necessary to reconcile these two in order to arrive at cash outflow related to cost of goods sold for project cash flow analysis? (c) What is the cash flow related to the 'selling, general, administrative and other expenses' of XYZ? (d) Distinguish between 'accounting depreciation' and 'tax-allowable depreciation' and explain why only tax-allowable depreciation has implications for project cash flows. (e) What is 'EBIT' and why is it not used in project cash flows? (f) Why is 'interest expense' and its tax savings not included in project cash flow analysis? (g) In the context of project cash flow analysis, define 'taxable income'. (h) Define 'tax payable' in the context of project cash flow analysis. (i) Define 'net income'. (j) Derive the year's cash flow from the XYZ Income Statement after considering the points discussed in the answers to previous parts.

   A simplified hypothetical accounting income statement for XYZ Company is given below.
Income Statement for XYZ Company, year ending 31 December 2002
$$
\begin{array}{lr}
& \$ \text { millions } \\
\text { Sales } & 45,000 \\
\text { Cost of goods sold } & 14,000 \\
\text { Other expenses } & 350 \\
\text { Selling, general and administrative expenses } & 12,455 \\
\text { Depreciation } & \underline{2,500} \\
\text { Earnings before interest and taxes (EBIT) } & 15,695 \\
\text { Interest expense } & \underline{495} \\
\text { Taxable income } & 15,200 \\
\text { Tax payable @ 30\% } & \underline{4,560} \\
\text { Net income (after tax) } & 10,640
\end{array}
$$
Further information:
Sales: It is reasonable to assume that approximately $50 \%$ of sales are on credit. The credit terms are 90 days. For simplicity, assume all credit customers take the full 90 days to pay.

Cost of goods sold: In addition to the cost of goods sold given in the table, inventories increased $\$ 60$ million in this year.

Selling, general, administrative and other expenses: The XYZ Company has 90 days to pay on all accounts and the company takes full advantage of this facility.
(a) What is the difference between the 'sales' in this financial statement and in what would be recorded as a project's cash flow? What is the cash inflow from sales for XYZ?
(b) How is the 'cost of goods sold' recorded in financial statements? Can the cost of goods sold and its cash flow be easily reconciled? Is it really necessary to reconcile these two in order to arrive at cash outflow related to cost of goods sold for project cash flow analysis?
(c) What is the cash flow related to the 'selling, general, administrative and other expenses' of XYZ?
(d) Distinguish between 'accounting depreciation' and 'tax-allowable depreciation' and explain why only tax-allowable depreciation has implications for project cash flows.
(e) What is 'EBIT' and why is it not used in project cash flows?
(f) Why is 'interest expense' and its tax savings not included in project cash flow analysis?
(g) In the context of project cash flow analysis, define 'taxable income'.
(h) Define 'tax payable' in the context of project cash flow analysis.
(i) Define 'net income'.
(j) Derive the year's cash flow from the XYZ Income Statement after considering the points discussed in the answers to previous parts.
Show more…
Capital Budgeting: Financial Appraisal of Investment Projects
Capital Budgeting: Financial Appraisal of Investment Projects
Don Dayananda,… 1st Edition
Chapter 2, Problem 2 ↓

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For cash flow, we're interested in when the cash is actually received. - Given that 50% of XYZ's sales are on credit with 90-day terms, the cash inflow from sales would be the cash sales plus the collection of credit sales from the previous period. Assuming all  Show more…

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A simplified hypothetical accounting income statement for XYZ Company is given below. Income Statement for XYZ Company, year ending 31 December 2002 $$ \begin{array}{lr} & \$ \text { millions } \\ \text { Sales } & 45,000 \\ \text { Cost of goods sold } & 14,000 \\ \text { Other expenses } & 350 \\ \text { Selling, general and administrative expenses } & 12,455 \\ \text { Depreciation } & \underline{2,500} \\ \text { Earnings before interest and taxes (EBIT) } & 15,695 \\ \text { Interest expense } & \underline{495} \\ \text { Taxable income } & 15,200 \\ \text { Tax payable @ 30\% } & \underline{4,560} \\ \text { Net income (after tax) } & 10,640 \end{array} $$ Further information: Sales: It is reasonable to assume that approximately $50 \%$ of sales are on credit. The credit terms are 90 days. For simplicity, assume all credit customers take the full 90 days to pay. Cost of goods sold: In addition to the cost of goods sold given in the table, inventories increased $\$ 60$ million in this year. Selling, general, administrative and other expenses: The XYZ Company has 90 days to pay on all accounts and the company takes full advantage of this facility. (a) What is the difference between the 'sales' in this financial statement and in what would be recorded as a project's cash flow? What is the cash inflow from sales for XYZ? (b) How is the 'cost of goods sold' recorded in financial statements? Can the cost of goods sold and its cash flow be easily reconciled? Is it really necessary to reconcile these two in order to arrive at cash outflow related to cost of goods sold for project cash flow analysis? (c) What is the cash flow related to the 'selling, general, administrative and other expenses' of XYZ? (d) Distinguish between 'accounting depreciation' and 'tax-allowable depreciation' and explain why only tax-allowable depreciation has implications for project cash flows. (e) What is 'EBIT' and why is it not used in project cash flows? (f) Why is 'interest expense' and its tax savings not included in project cash flow analysis? (g) In the context of project cash flow analysis, define 'taxable income'. (h) Define 'tax payable' in the context of project cash flow analysis. (i) Define 'net income'. (j) Derive the year's cash flow from the XYZ Income Statement after considering the points discussed in the answers to previous parts.
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