Tutorial 3- Question

1. Cindy and Robert (Rob) Castillo founded the Castillo Products Company in 2012. The company
manufactures components for personal decision assistant (PDA) products and for other handheld electronic products. Year 2012 proved to be a test of the Castillo Products Companys ability
to survive. However, sales increased rapidly in 2013 and the firm reported a net income after
taxes of $75,000. Depreciation expenses were $40,000 in 2013. Following are the Castillo
Products Companys balance sheets for 2012 and 2013.
CASTILLO PRODUCTS COMPANY
2012
Cash
$50,000
Accounts Receivables
200,000
Inventories
400,000
Total Current Assets
650,000
Gross Fixed Assets
450,000
Accumulated Depreciation
-100,000
Net Fixed Assets
350,000
Total Assets
$1,000,000
Accounts Payable
$130,000
Accruals
50,000
Bank Loan
90,000

Total Current Liabilities

Long-Term Debt
Common Stock ($.01 par)
Additional Paid-in-Capital
Retained Earnings
Total Liabilities & Equity
A.
B.
C.
D.

270,000
300,000
150,000
200,000
80,000
$1,000,000

2013
$20,000
280,000
500,000
800,000
540,000
-140,000
400,000
$1,200,000
$160,000
70,000
100,000

330,000
400,000
150,000
200,000
120,000
$1,200,000

Calculate Castillos cash flow from operating activities for 2013.

Calculate Castillos cash flow from investing activities for 2013.
Calculate Castillos cash flow from financing activities for 2013.
Prepare a formal statement of cash flows for 2013 and identify the major cash inflows and
outflows that were generated by the Castillo Company.
E. Use your calculation results from Parts A and B above to determine whether Castillo was
building or burning cash during 2013 and indicate the dollar amount of the cash build or
burn.
F. If Castillo had a net cash burn from operating and investing activities in 2013 divide the
amount of burn by 12 to calculate an average monthly burn amount. If the 2014 monthly
cash burn continues at the 2013 rate, indicate how long in months it will be before the firm
runs out of cash if there are no changes in financing activities.

2. The Castillo Products Company described in Problem 6 had a very difficult operating year in 2012
resulting in a net loss of $65,000 on sales of $900,000. In 2013, sales jumped to $1,500,000 and
a net profit after taxes was earned. The firms income statements are below.

CASTILLO PRODUCTS COMPANY

Net Sales
Cost of Goods Sold
Gross Profit
Marketing
General & Administrative
Depreciation
EBIT
Interest
Earnings Before Taxes
Income Taxes
Net Income (Loss)

2012
$900,000
-540,000
360,000
-90,000
-250,000
-40,000
-20,000
-45,000
-65,000
0
-$65,000

2013
$1,500,000
-900,000
600,000
-150,000
-250,000
-40,000
160,000
-60,000
100,000
-25,000*
$75,000

*Includes tax loss carryforward from 2012.

A. Calculate each income statement item for 2012 as a percent of the 2012 sales level. Make
the same calculations for 2013. Determine which cost or expense items varied directly with
sales for the two-year period?
B. Use the information in Part A to classify specific expense items as being either variable or
fixed expenses. Then estimate Castillos EBDAT breakeven in terms of survival revenues if
interest expenses had remained at the 2012 level ($45,000) in 2013.
C. Estimate the dollar amount of survival revenues actually needed by the Castillo Products
Company to reach EBDAT breakeven in 2013 given that more debt was obtained and interest
expenses increased to $60,000.

3. Salza Technology Corporation increased its sales from $375,000 in 2012 to $450,000 in year 2013 as
is shown in the firms income statements presented below. LeAnn Sands, chief executive officer
(CEO) and founder of the firm expressed concern that the cash account and the firms marketable
securities declined substantially between 2012 and 2013. Salzas complete balance sheets are also
shown below. Ms. Sands is seeking your assistance in the preparation of a statement of cash flows
for Salza Technology.

SALZA TECHNOLOGY CORPORATION

Annual Income Statements (in $ Thousands)
Net sales
Less: Cost of goods sold
Gross profit
Less: Operating expenses
Less: Depreciation
Less: Interest
Income before taxes
Less: Income taxes
Net income
Cash dividends

2012
$375
225
150
46
25
4
75
20
55

2013
$450
270
180
46
30
4
100
30
70

$17

$20

Balance Sheets as of December 31 (in $ Thousands)

Cash
Accounts receivable
Inventories
Total current assets
Gross fixed assets
Less accumulated depreciation
Net fixed assets
Total assets
Accounts payable
Bank loan
Accrued liabilities
Total current liabilities
Long-term debt
Common stock
Retained earnings
Total liabilities and equity

2012
$ 39
50
151
240
200
-95
105
$345
$ 30
20
10
60
15
85
185
$345

2013
$ 16
80
204
300
290
-125
165
$465
$ 45
27
23
95
15
120
235
$465

A. Prepare a statement of cash flows for 2013 for the Salza Technology Corporation.
B. Provide a brief description of what happened in terms of cash flows (both inflows and
outflows) for Salza between years 2012 and 2013.
C. Use your calculations from Part A for cash flows from operating and investing activities
to indicate the extent to which Salza was building or burning cash in 2013.
D. Convert the 2013 annual cash build or cash burn to a monthly rate. If cash flow activities
relating to operations and investing for 2013 continue into 2014, indicate: (1) how long it
will be before Salza runs out of cash (if Salza is burning cash), or (2) the expected 2014
year-end cash account balance if Salza is building cash. Assume no changes in cash flows
from financing activities in 2014 for calculation purposes.

4. LeAnn Sands wants to conduct operating breakeven analyses of the Salza Technology
Corporation for year 2013. Income statement information is shown in Problem 3 above.
For year 2038, the firms cost of goods sold is considered to be variable costs and
operating expenses are considered to be fixed cash costs. Depreciation expenses in year
2013 also are expected to be fixed costs. Calculate Salzas EBDAT breakeven in terms of
survival revenues for year 2013.
5. LeAnn Sands has reason to believe that year 2014 will be a replication of year 2013 except
that cost of goods sold are expected to be 65 percent of the estimated $450,000 in
revenues. Other income statement relationships are expected to remain the same in year
2014 as they were in year 2013. Calculate the EBDAT breakeven point for 2014 for Salza
in terms of survival revenues.

Refer to Problems 4 and 5 in the chapter involving the Salza Technology Corporation (see
Problem 3 for the firms financial statements).
A. Calculate Salzas NOPAT breakeven in terms of NOPAT breakeven revenues for year
2013.
B.

Calculate the NOPAT breakeven point for 2014 for Salza in terms of NOPAT
breakeven revenues.