 # Compute CFF

An analyst has gathered the following information about a company: Income Statement 2005 Sales \$908 Expenses COGS \$512 Depreciation 6 Selling, General & Admin. 129 Interest 53 Total expenses 700 Pre-tax income 208 Taxes 83 Net income \$125 Balance Sheet Assets 2004 2005 Liabilities 2004 2005 Cash 60 80 Accts. Payable 100 75 Accts. Rec. 140 155 Wages payable 80 85 Inventories 47 72 Bonds 65 80 Fixed Assets 120 160 Common Stock 40 70 Accum. Depr. (29) (35) Retained Earnings 53 122 Total 338 432 338 432 Note: the dividend payout ratio equals 45 percent. What is the Cash Flow From Financing? A. -11 B. 0 C. 4 D. -4

Bonds = +15 Common Stock = + 30 DP = -56 So CFF = -11 RE Begin + NI - Dividend Paid = RE End 53 + 125 - DP = 122 DP = 56

cpk123 is on top of the game

CFF for 2005 are: Issuance of Bonds \$15 (inflow) Issuance of Common Stock \$30 (inflow) Dividend Payment is \$125*45% = \$56.25 (outflow) Total CFF is \$15 + \$30 - \$56.25 = -\$11.25 Therefore, answer is A.

finance03 In this question – we might be just plain lucky that the two numbers - calculation thro’ RE account, and the calculation of the Dividend using the Payout ratio are identical. Couldn’t the Dividend Payout “factor” that you have calculated gone into the Dividends Payable account - in that case – would it go into the CFF calculation as an outflow? CP

CFF = (issuance of Bonds) (15) + (issuance/sale of Common Stock) (30) – Dividends (56) = -\$11 nice work, you are all on top of your game. I think it’s easy to overlook the div payout raio on the statement of cash flows. I just got this question wrong because I forgot to include the divadends. Ans = A

cpk- I made my calculation based on the assumption that dividends were paid in full for the period, and there were no dividends from prior periods that were paid. On the balance sheet, there is no entry for dividends payable in either 2004 or 2005, which indicates there is no change in dividends payable, which leads me to assume the dividend was fully paid out. If there was indeed a change in dividends payable from 2004 to 2005, I would have first started from the \$125 * 45% number, then adjusted my answer by subtracting the amount of the decrease in dividends payable or likewise adding the amount of the increase in dividends payable. Slightly different from the way you did it but obviously doing the exact same thing! Please let me know if there is anything wrong with this reasoning. Thanks

divident payout ratio of 45% is redundant information.

Maratikus, if dividend payout ratio is given, without a mention of retained earnings or change in dividends payable, it can be used to calculate CFF. I understand that it is redundant information here, but you can also make the claim that the retained earnings information is redundant is this context because there are no changes in dividends payable.

i agree with you, finance03.