Sellstuff Company reported the following selected financial statement data for the year ended December 31, 20X7:
| in millions | % of Sales | |
|---|---|---|
| For the year ended December 31, 20X7: | $500 | 100% |
| Sales | ||
| Cost of goods sold | (300) | 60% |
| Selling and administration expenses | (125) | 25% |
| Depreciation | (50) | 10% |
| Net income | $25 | 5% |
| As of December 31, 20X7: | ||
| Non-cash operating working capitala | $100 | 20% |
| Cash balance | $35 | N/A |
Non-cash operating working capital = Receivables + Inventory – Payables
Sellstuff expects that sales will increase 20% in 20X8. In addition, Sellstuff expects to make fixed capital expenditures of $75 million in 20X8. Ignoring taxes, calculate Sellstuff expected cash balance, as of December 31, 2008, assuming all of the common-size percentages remain constant.
Response:
2008 sales are expected to be $600 million ($500 million 2007 sales × 1.2) and 20X8 net income is expected to be $30 million ($600 million 20X8 sales × 5%). 2008 non-cash operating working capital is expected to be $120 million ($600 million 20X8 sales × 20%). The change in cash is expected to be –$5 million ($30 million 20X8 net income + $60 million 20X8 depreciation – $20 million increase in non-cash operating working capital – $75 million 20X8 capital expenditures). The 20X8 ending balance of cash is expected to be $30 million ($35 million beginning cash balance – $5 million decrease in cash).
What i don’t get is that they asked for calculating the end of year 20X8 cash balance, but proceeded in calculating what seems to me to be Cashflow from operation using the indirect method…
To me we should simply do this with 20X8 figures : Revenue - COGS - Selling and administration expenses - 20X8 capital expenditure + 20X7 cash balance. And this should give us the actual cash balance.
Is it me or the question’s wording is maybe misleading?