Grant Kesler is the manager and one of three brothers who own the Rocky Mountain Auto Parts Company in Denver, Colorado. Grant is pleased that sales were up last year and that his new, small company has been able to expand and open a second store in Denver. After reviewing the balance sheet, however, Grant is concerned that Cash shows a negative balance. He can’t understand how his company can show net income, based on increased sales, yet have a negative Cash position. He is concerned about what his banker is going to say when they meet next month to discuss a loan for the company to expand to a third store. Grant provides the following financial information and asks for your help.
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Sales. |
$150,000 |
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Less cost of goods sold . |
63,000 |
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Gross margin |
$ 87,000 |
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Operating expenses: |
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Salary and wages |
$32,000 |
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Depreciation |
4,500 |
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Other operating expenses |
12,400 |
48,900 |
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Operating income |
$ 38,100 |
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Income taxes |
8,200 |
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Net income.. |
$ 29,900 |
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Rocky Mountain Auto Parts Company |
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Comparative Balance Sheets |
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As of December 31, 2003 and 2002 |
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Assets |
2003 |
2002 |
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Current assets: |
$ (3,200) |
$ 6,400 |
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Cash |
3,100 |
2,700 |
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Accounts receivable (net). |
63,000 |
42,000 |
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Inventory |
$ 62,900 |
$51,100 |
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Total current assets . |
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Other assets: |
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Property, plant, and equipment |
$ 82,300 |
$39,000 |
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Less accumulated depreciation |
(20,100) |
(15,600) |
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Total other assets |
$ 62,200 |
$23,400 |
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Total assets |
$125,100 |
$74,500 |
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Liabilities and Stockholders’ Equity |
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Current liabilities: |
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Accounts payable |
$ 6,400 |
$ 5,700 |
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Wages payable . |
1,500 |
1,300 |
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Taxes payable |
1,900 |
2,100 |
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Total current liabilities |
$ 9,800 |
$ 9,100 |
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Other liabilities: |
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Notes payable. |
30,000 |
10,000 |
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Total liabilities |
$ 39,800 |
$19,100 |
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Stockholders’ equity: |
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Capital stock |
$ 40,000 |
$40,000 |
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Retained earnings |
45,300 |
15,400 |
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Total stockholders’ equity . |
$ 85,300 |
$55,400 |
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Total liabilities and stockholders’ equity |
$125,100 |
$74,500 |
1.Using the direct method, compute the net cash flows from operations. Also determine net cash flows for investing and financing activities.
2. Interpretive Question: Is Rocky Mountain Auto Parts Company in a good liquidity position? As Mr. Kesler’s banker, would you loan him more money to fund the company’s expansion?