Kimmel Financial Accounting Solutions Ch12

CHAPTER 12 Statement of Cash Flows Study Objectives 1. Indicate the usefulness of the statement of cash flows. 2. Distinguish among operating, investing, and financing activities. 3. Explain the impact of the product life cycle on a company’s cash flows. 4. Prepare a statement of cash flows using the indirect method. 5. Use the statement of cash flows to evaluate a company. *6. Prepare a statement of cash flows using the direct method. Summary of Questions by Study Objectives and Bloom’s Taxonomy |Item | |? 1. | |? 1. | |? 1. | |? 1. |? 1. | |? 1. |2 |C |? 4|6* |AP|? 7. | | | | |. | | | | | | | | | | | | |1A | |Distinguish among operating, investing, and financing | |Simple | |10–15 | | | |activities. | | | | | | | | | | | | |2A | |Determine cash flow effects of changes in equity accounts. | |Simple | |10–15 | | | | | | | | | |3A | |Prepare the operating activities section—indirect method. |Simple | |20–30 | | | | | | | | | |*4A | |Prepare t he operating activities section—direct method. | |Simple | |20–30 | | | | | | | | | |5A | |Prepare the operating activities section—indirect method. |Simple | |20–30 | | | | | | | | | |*6A | |Prepare the operating activities section—direct method. | |Simple | |20–30 | | | | | | | | | |7A | |Prepare a statement of cash flows—indirect method, and compute cash-based ratios. |Moderate | |40–50 | | | | | | | | | |*8A | |Prepare a statement of cash flows—direct method, and compute cash-based ratios. | |Moderate | |40–50 | | | | | | | | | |9A | |Prepare a statement of cash flows—indirect method. |Moderate | |40–50 | | | | | | | | | |*10A | |Prepare a statement of cash flows—direct method. | |Moderate | |40–50 | | | | | | | | | |11A | |Prepare a statement of cash flows—indirect method. | |Moderate | 40–50 | | | | | | | | | |12A | |Identify the impact of transactions on ratios. | | Moderate | |25–35 | | | | | | | | | |1B | |Distinguish among operating, investing, and financing | |Simple | |10–15 | | | |activities. | | | | | | | | | | | | |2B | |Determine cash flow effects of changes in plant asset | |Simple | |10–15 | | | |accounts. | | | | | | | | | | | | | |3B | |Prepare the operating activities section—indirect method. |Simple | |20–30 | | | | | | | | | |*4B | |Prepare the operating activities section—direct method. | |Simple | |20–30 | | | | | | | | | |5B | |Prepare the operating activities section—indirect method. |Simple | |20–30 | | | | | | | | | |*6B | |Prepare the operating activities section—direct method. | |Simple | |20–30 | | | | | | | | | |7B | |Prepare a statement of cash flows—indirect method, and compute cash-based ratios. |Moderate | |40–50 | | | | | | | | | ASSIGNMENT CHARACTERISTICS TABLE (Continued) |Problem | | | |Difficulty | |Time | |Number | |Des cription | |Level | |Allotted (min. | | | | | | | | | |*8B | |Prepare a statement of cash flows—direct method, and compute cash-based ratios. | |Moderate | |40–50 | | | | | | | | | |9B | |Prepare a statement of cash flows—indirect method. |Moderate | |40–50 | | | | | | | | | |*10B | |Prepare a statement of cash flows—direct method. | |Moderate | |40–50 | | | | | | | | | |11B | |Prepare a statement of cash flows—indirect method. | |Moderate | |40–50 | | | | | | | | |ANSWERS TO QUESTIONS ?1. (a)The statement of cash flows reports the cash receipts, cash payments, and net change in cash resulting from the operating, investing, and financing activities of a company during a period in a format that reconciles the beginning and ending cash balances. (b)Disagree. The statement of cash flows is required. It is the fourth basic financial statement. ?2. The statement of cash flows answers the following questions about cash: (a) Where di d the cash come from during the period? (b) What was the cash used for during the period? nd (c) What was the change in the cash balance during the period? ?3. The three activities are: Operating activities include the cash effects of transactions that create revenues and expenses and thus enter into the determination of net income. Investing activities include: (a) purchasing and disposing of investments and productive long-lived assets and (b) lending money and collecting loans. Financing activities include: (a) obtaining cash from issuing debt and repaying amounts borrowed and (b) obtaining cash from stockholders, repurchasing shares, and paying them dividends. ?4. a)Major sources of cash in a statement of cash flows include cash from operations; issuance of debt; collection of loans; issuance of capital stock; sale of investments; and the sale of property, plant, and equipment. (b)Major uses of cash include purchase of inventory, payment of cash dividends; redemption of debt; pu rchase of investments; making loans; redemption of capital stock; and the purchase of property, plant, and equipment. ?5. The statement of cash flows presents investing and financing activities so that even noncash transactions of an investing and financing nature are disclosed in the financial statements.If they affect financial conditions significantly, the FASB requires that they be disclosed in either a separate schedule at the bottom of the statement of cash flows or in a separate note or supplementary schedule to the financial statements. ?6. Examples of significant noncash activities are: (1) issuance of stock for assets, (2) conversion of bonds into common stock, (3) issuance of bonds or notes for assets, and (4) noncash exchanges of property, plant, and equipment. ?7. Comparative balance sheets, a current income statement, and certain transaction data all provide information necessary for preparation of the statement of cash flows.Comparative balance sheets indicate how ass ets, liabilities, and equities have changed during the period. A current income statement provides information about the amount of cash provided or used by operations. Certain transactions provide additional detailed information needed to determine how cash was provided or used during the period. ?8. (a)The phases of the corporate life cycle are the introductory phase, growth phase, maturity phase, and decline phase. (b)During the introductory phase, cash from operations and investing would be expected to be negative, and cash from financing would be positive.Questions Chapter 12 (Continued) During the growth phase, a company would be expected to show some small amounts of cash from operations while continuing to show negative cash from investing and positive cash from financing. During the maturity phase, cash from operations, investing, and financing would all be expected to be positive while in the decline phase, cash from operations and investing would continue to be positive wh ile cash from financing would be negative. ?9. Tootsie Roll has positive cash from operations that exceeds its net income.Cash from operations exceeded its investing needs and it retired shares of stock and paid dividends. Tootsie Roll appears to be in the middle to late maturity phase. 10. The advantage of the direct method is that it presents the major categories of cash receipts and cash payments in a format that is similar to the income statement and familiar to statement users. Its principal disadvantage is that the necessary data can be expensive and time-consuming to accumulate. The advantage of the indirect method is it is often considered easier o prepare, and it provides a reconciliation of net income to net cash provided by operating activities. It also tends to reveal less company information to competitors. Its primary disadvantage is the difficulty in understanding the adjustments that comprise the reconciliation. Both methods are acceptable but the FASB expressed a pr eference for the direct method. Yet, the indirect method is the overwhelming favorite of companies. 11. When total cash inflows exceed total cash outflows, the excess is identified as a â€Å"net increase in cash† near the bottom of the statement of cash flows. 12.The indirect method involves converting accrual net income to net cash provided by operating activities. This is done by starting with accrual net income and adjusting for items that do not affect cash. Examples of adjustments include depreciation and other noncash expenses, gains and losses on the sale of noncurrent assets, and changes in the balances of current asset and current liability accounts from one period to the next. 13. It is necessary to convert accrual-based net income to cash-basis income because the unadjusted net income includes items that do not provide or use cash.An example would be an increase in accounts receivable. If accounts receivable increased during the period, revenues reported on the ac crual basis would be higher than the actual cash revenues received. Thus, accrual-basis net income must be adjusted to reflect the net cash provided by operating activities. 14. A number of factors could have caused an increase in cash despite the net loss. These are (1) high cash revenues relative to low cash expenses; (2) sales of property, plant, and equipment; (3) sales of investments; (4) issuance of debt or capital stock, and (5) differences between cash and accrual accounting, e. . depreciation. 15. Depreciation expense. Gain or loss on sale of a noncurrent asset. Increase/decrease in accounts receivable. Increase/decrease in inventory. Increase/decrease in accounts payable. Questions Chapter 12 (Continued) 16. Under the indirect method, depreciation is added back to net income to reconcile net income to net cash provided by operating activities because depreciation is an expense but not a cash payment. 17.The statement of cash flows is useful because it provides information to the investors, creditors, and other users about: (1) the company’s ability to generate future cash flows, (2) the company’s ability to pay dividends and meet obligations, (3) the reasons for the difference between net income and net cash provided by operating activities, and (4) the cash and noncash financing and investing transactions during the period. 18. This transaction is reported in the note or schedule entitled â€Å"Noncash investing and financing activities† as follows: â€Å"Retirement of bonds payable through issuance of common stock, $1,700,000. 19. (a)The current ratio is an accrual-based ratio that measures liquidity while the current cash debt coverage ratio is a cash-based ratio that measures liquidity. (b)Solvency can be measured by the debt to total assets ratio (accrual-based) or the cash debt coverage ratio (cash-based). *20. Net cash provided by operating activities under the direct approach is the difference between cash revenues and c ash expenses. The direct approach adjusts the revenues and expenses directly to reflect the cash basis. This results in cash net income, which is equal to â€Å"net cash provided by operating activities. | | | | | |  + Decrease in accounts receivable | |*21. |(a) |Cash receipts from customers = Revenues from sales | | | | | | | | | |  Ã¢â‚¬â€œ Increase in accounts receivable | | | | | | | | | | | | |  + Increase in inventory | | |(b) |Purchases = Cost of goods sold | | | | | | | | | |  Ã¢â‚¬â€œ Decrease in inventory | | | | | | | | | | | | |  + Decrease in accounts payable | | | |Cash payments to suppliers = Purchases | | | | | | | | | |  Ã¢â‚¬â€œ Increase in accounts payable | | | | | | | | 22. Sales$2,000,000 Add: Decrease in accounts receivables 100,000 Cash receipts from customers$2,100,000 *23. Depreciation expense is not listed in the direct method operating activities section because it is not a cash flow item—it does not affect cash. SOLUTIONS TO BRIEF EXERCISES BRIEF EXERCISE 12-1 (a)Cash inflow from financing activity, $200,000. (b)Cash outflow from investing activity, $150,000. (c)Cash inflow from investing activity, $20,000. (d)Cash outflow from financing activity, $50,000.BRIEF EXERCISE 12-2 (a)Investing activity. (d)Operating activity. (b)Investing activity. (e)Financing activity. (c)Financing activity. (f)Financing activity. BRIEF EXERCISE 12-3 Cash flows from financing activities Proceeds from issuance of bonds payable$300,000) Payment of dividends(70,000) Net cash provided by financing activities$230,000) BRIEF EXERCISE 12-4 (a)Cash from operations would be lower than net income during the growth phase because inventory must be purchased for future projected sales.Since sales during the growth phase are projected to be increasing, inventory purchases must increase and inventory expensed on an accrual basis would be less than inventory purchased on a cash basis. Also, collections on accounts receivable would lag beh ind sales; thus, accrual sales would exceed cash collections during the period. (b)Cash from investing is often positive during the late maturity phase and the decline phase because the firm may sell off excess long-term assets that are no longer needed for productive purposes. BRIEF EXERCISE 12-5Net cash provided by operating activities is $2,680,000. Using the indirect approach, the solution is: Net income$2,500,000 Adjustments to reconcile net income to net cash provided by operating activities Depreciation expense$110,000) Accounts receivable decrease? 350,000) Accounts payable decrease(280,000) 180,000 Net cash provided by operating activities$2,680,000 BRIEF EXERCISE 12-6 Cash flows from operating activities Net income$280,000 Adjustments to reconcile net income to net cash provided by operating activities Depreciation expense$70,000Loss on sale of plant assets? 22,000 92,000 Net cash provided by operating activities$372,000 BRIEF EXERCISE 12-7 Net income$200,000 Adjustm ents to reconcile net income to net cash provided by operating activities Decrease in accounts receivable$80,000) Increase in prepaid expenses(28,000) Increase in inventories(40,000) 12,000 Net cash provided by operating activities$212,000 BRIEF EXERCISE 12-8 Original cost of equipment sold$22,000 Less: Accumulated depreciation 5,500 Book value of equipment sold? 16,500 Less: Loss on sale of equipment 3,500Cash flow from sale of equipment$13,000 BRIEF EXERCISE 12-9 (a)Free cash flow = $127,260,000 – $221,160,000 – $0 = ($93,900,000) (b)Current cash debt coverage ratio = $127,260,000 ? $243,668,000 = .52 times (c)Cash debt coverage ratio = $127,260,000 ? $928,464,500 = . 14 times BRIEF EXERCISE 12-10 (a)Free cash flow = $405,000 – $200,000 – $0 = $205,000 (b)Current cash debt coverage ratio = $405,000 ? $150,000 = 2. 7 times (c)Cash debt coverage ratio = $405,000 ? $225,000 = 1. 8 times BRIEF EXERCISE 12-11 Free cash flow = $123,100,000 – $20,800, 000 = $102,300,000 BRIEF EXERCISE 12-12Free cash flow is cash provided by operations less capital expenditures and cash dividends paid. For Payne Inc. this would be $364,000 ($734,000 – $280,000 – $90,000). Since it has positive free cash flow that far exceeds its dividend, an increase in the dividend might be possible. However, other factors should be considered. For example, it must have adequate retained earnings, and it should be convinced that a larger dividend can be sustained over future years. It should also use the free cash flow to expand its operations or pay down its debt. *BRIEF EXERCISE 12-13 | | | | | | + Decrease in accounts receivable | |Receipts from |= |Sales | | | | | |customers | |revenues | | | | | | | | | | | | – Increase in accounts receivable | | | | | | | | | $1,285,759,000 = $1,287,672,000 – $1,913,000 (Increase in accounts receivable) *BRIEF EXERCISE 12-14 | | | | | | + Decrease in income taxes payable | |Cash payment |= |Incom e Tax | | | | | |for income taxes | |Expense | | | | | | | | | | | | – Increase in income taxes payable | | | | | | | | | $125,000,000 = $370,000,000 – $245,000,000* *$522,000,000 – $277,000,000 = $245,000,000 (Increase in income taxes payable) *BRIEF EXERCISE 12-15 | | | | | | + Increase in prepaid expenses | | | | | | | | | |Cash |= |Operating | | | | – Decrease in prepaid expenses | |payments for | |expenses, | | | | | |operating | |excluding | | | | | |expenses | |depreciation | | | | | | | | | | | | | | | | | | | |and  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚   | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | + Decrease in accrued expenses payable | | | | | | | | | | | | | | | | – Increase in accrued expenses payable | | | | | | | | | $79,000 = $90,000 – $6,600 – $4,400 SOLUTIONS TO DO IT! REVIEW EXERCISES DO IT! 12-1 (1)Financing activity (2)Operating activity (3)Financing activity (4)Investing activity (5)Investing acti vity DO IT! 12-2 Cash flows from operating activities Net income$100,000 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation expense$6,000 Patent amortization expense2,000 Gain on sale of equipment(3,600) Decrease in accounts receivable6,000 Increase in accounts payable   3,200  Ã‚  Ã‚  Ã‚  13,600 Net cash provided by operating activities$113,600 DO IT! 12-3 (a) Free cash flow = $73,700 – $27,000 –$15,000 = $31,700 b) Cash provided by operating activities fails to take into account that a company a must invest in new plant assets just to maintain the current level of operations. Companies must also maintain dividends at current levels to satisfy investors. The measurement of free cash flow provides additional insight regarding a company’s cash-generating ability. SOLUTIONS TO EXERCISES EXERCISE 12-1 (a)Noncash investing and financing activities. (b)Financing activities. (c)Noncash investing and financing activities. (d)Financing activities. (e)Investing activities. (f)Operating activities. (g)Operating activities. EXERCISE 12-2 |(a) |Operating activity. | |(h) |Financing activity. |(b) |Noncash investing and | |(i) |Operating activity. | | |financing activity. | |(j) |Noncash investing and financing | |(c) |Investing activity. | | |activity. | |(d) |Financing activity. | |(k) |Investing activity. | |(e) |Operating activity. | |(l) |Operating activity. | |(f) |Noncash investing and financing activity. | |(m) |Operating activity (loss); investing | | |Operating activity. | | |activity (cash proceeds from sale). |(g) | | |(n) |Financing activity. | EXERCISE 12-3 |Point in Time | |Phase | | | | | |A | |Introductory phase | |B | |Decline phase | |C | |Maturity phase | |D | |Growth phase | During the introductory phase (point A), cash from operations and investing are expected to be negative while cash from financing would be positive.In the growth phase (point D), a company would continue to show negative cash from operations and investing and positive cash from financing. EXERCISE 12-3 (Continued) During the maturity phase (point C), cash from operations and net income would be approximately the same. Cash from operations would exceed investing needs. In the decline phase (point B), cash from operations would diminish while cash from financing would be negative. EXERCISE 12-4 JEREZ COMPANY Partial Statement of Cash Flows For the Year Ended December 31, 2010 Cash flows from operating activities Net income$190,000 Adjustments to reconcile net income to net cash provided by operating activities Depreciation expense$35,000Loss on sale of equipment 5,000 Increase in accounts payable? 17,000 Decrease in accounts receivable? 15,000 Decrease in prepaid expenses 4,000 76,000 Net cash provided by operating activities$266,000 EXERCISE 12-5 KITSELTON INC. Partial Statement of Cash Flows For the Year Ended December 31, 2010 Cash flows from operating activities Net income$153,000 Adjus tments to reconcile net income to net cash provided by operating activities Depreciation expense$34,000) Increase in accrued expenses payable? 10,000) Decrease in inventory? 4,000 Increase in prepaid expenses (5,000) Decrease in accounts payable(7,000) Increase in accounts receivable  (11,000) 25,000Net cash provided by operating activities$178,000 EXERCISE 12-6 FELIX CORPORATION Statement of Cash Flows—Indirect Method For the Year Ended December 31, 2010 Cash flows operating activities Net income$284,100 Adjustments to reconcile net income to net cash provided by operating activities Depreciation expense$187,000 Increase in income tax payable4,700 Decrease in accounts payable     Ã‚  (3,700) Increase in accounts receivable(8,200) Increase in inventory   (11,000)   168,800 Net cash provided by operating activities452,900 Cash flows from investing activities Sale of land     Ã‚  35,000 Purchase of building  (129,000) Net cash used by investing activities(94,0 00)Cash flows from financing activities Issuance of bonds200,000 Payment of dividend   (12,000) Purchase of treasury stock     (32,000) Net cash provided by financing activities   156,000 Net increase in cash514,900 Cash at beginning of period  Ã‚  Ã‚  Ã‚  45,000 Cash at end of period$559,900 EXERCISE 12-7 TOVAR CORP Partial Statement of Cash Flows For the Year Ended December 31, 2010 Cash flows from operating activities Net income$? 72,000) Adjustments to reconcile net income to net cash provided by operating activities Depreciation expense$28,000) Loss on sale of equipment 8,000) 36,000) Net cash provided by operating activities? 108,000) Cash flows from investing activitiesSale of equipment? 11,000* Purchase of equipment(70,000) Construction of equipment(53,000) Net cash used by investing activities(112,000) Cash flows from financing activities Payment of cash dividends? (19,000) *Cost of equipment sold$49,000) *Accumulated depreciation (30,000)) *Book value? 19,000) *Loss on sale of equipment? (8,000)) *Cash proceeds$11,000) EXERCISE 12-8 (a)MATSUI COMPANY Statement of Cash Flows For the Year Ended December 31, 2010 Cash flows from operating activities Net income$ 93,000) Adjustments to reconcile net income to net cash provided by operating activities Depreciation expense$34,000) Decrease in inventory? 19,000)Increase in accounts receivable? (9,000) Decrease in accounts payable(8,000) 36,000) Net cash provided by operating activities? 129,000) Cash flows from investing activities Sale of land? 20,000) Purchase of equipment(60,000) Net cash used by investing activities? (40,000) Cash flows from financing activities Issuance of common stock? 42,000) Payment of cash dividends (35,000) Redemption of bonds (50,000) Net cash used by financing activities? (43,000) Net increase in cash 46,000) Cash at beginning of period 22,000) Cash at end of period$? 68,000) EXERCISE 12-8 (Continued) (b)1. Current cash debt coverage ratio: |Net cash provided |? Average current | |by operating activities | |liabilities | |$129,000 |? |[pic] |= |3. 0 times | |[Per Part (a)] | | | | | 2. Cash debt coverage ratio: |Net cash provided |? |Average total | |by operating activities | |liabilities | $129,000 ? [pic] = . 59 times *$47,000 + $200,000 **$39,000 + $150,000 EXERCISE 12-9 | | | |PepsiCo |Coca-Cola | |(a) |Liquidity | | | | | | |Current cash debt | |[pic] = . 75 times | |[pic] = . 64 times | | |coverage ratio | | | | | |(b) |Solvency | | | | | | |Cash debt coverage ratio | |[pic] = . 38 times | |[pic] = . 6 times | | | | | | | | | |Free cash flow | |$6,084 – $2,068 – $1,854 | |$5,957 – $1,407 – $2,911 | | | | |= $2,162 | |= $1,639 | PepsiCo’s liquidity is higher (better) than Coca-Cola’s. PepsiCo’s current cash debt coverage ratio is 17% higher than Coca-Cola’s. Coca-Cola’s solvency is slightly higher than PepsiCo’s since its cash debt coverage ratio is higher but its f ree cash flow smaller. EXERCISE 12-10 | | |Hoyt | |Rex | | | | |Corporation | |Corporation | |(a) |Liquidity | | | | | | |Current cash debt | |[pic] = 2. 0 times | |[pic] = 1. 0 times | | |coverage ratio | | | | | |(b) |Solvency | | | | | | |Cash debt | |[pic] = . 50 times | |[pic] = 0. 0 times | | |coverage ratio | | | | | | | | | | | | | |Free cash flow | |$100,000 – $40,000 – $5,000 | |$100,000 – $70,000 – $10,000 | | | | |= $55,000 | |= $20,000 | Hoyt’s liquidity and solvency ratios are higher (better) than Rex’s comparable ratios. In particular, Hoyt’s current cash debt coverage ratio is twice as high as Rex’s.This ratio indicates that Hoyt is substantially more liquid than Rex. Hoyt’s solvency, as measured by the cash debt coverage ratio and free cash flow, is also better than Rex’s. *EXERCISE 12-11 Revenues$192,000) Deduct: Increase in accounts receivable(70,000) Cash receipts from customers*$122,000 O perating expenses 83,000) Deduct: Increase in accounts payable(23,000) Cash payments for operating expenses** 60,000 Net cash provided by operating activities$? 62,000 |** |Accounts Receivable | | |Balance, Beginning of year    | | | |Revenues for the year 192,000   |  Cash receipts for year 122,000 | | |Balance, End of year ? 70,000   | | |** |Accounts Payable | | | |  Balance, Beginning of year 0 | | |Payments for the year ? 0,000   |  Operating expenses for year ? 83,000 | | | |  Balance, End of year ? 23,000 | *EXERCISE 12-12 (a)Cash payments to suppliers Cost of goods sold$5,349. 7million Add: Increase in inventory 4. 7 Cost of purchases$5,354. 4million Deduct: Increase in accounts payable(156. 1) Cash payments to suppliers$5,198. 3million (b)Cash payments for operating expenses Operating expenses exclusive of depreciation ($11,791. 6 – $1,249. 9)$10,541. 7millionDeduct: Decrease in prepaid expenses$(204. 5) Increase in accrued expenses payabl e  (37. 0) (241. 5) Cash payments for operating expenses$10,300. 2million *EXERCISE 12-13 Cash flows from operating activities Cash receipts from Customers$240,000* Dividend revenue 18,000* ?258,000* Less cash payments: To suppliers for merchandise$105,000 For salaries and wages? 53,000 For operating expenses? 28,000 For income taxes? 12,000 For interest     Ã‚  10,000? 208,000* Net cash provided by operating activities$? 50,000* *$48,000 + $192,000 *EXERCISE 12-14 MOSQUITO HOLLOW CORP. Statement of Cash Flows—Direct Method For the Year Ended December 31, 2010Cash flows form operating activities Cash receipts from customers$566,100 Less: Cash payments: For goods and services$279,100 For income taxes93,000 For operating expenses77,000 For interest  Ã‚  Ã‚  Ã‚  22,400   471,500 Net cash provided by operating activities94,600 Cash flows form investing activities Sale of building202,400 Purchase of equipment  (113,200) Net cash provided by investing activities89,200 Cash flows from financing activities Issuance of common stock355,000 Payment of cash dividend (21,800) Purchase treasury stock(57,300) Cash paid to redeem bonds at maturity  (200,000) Net cash provided by financing activities  Ã‚  Ã‚   75,900 Net increase in cash259,700Cash at beginning of period  Ã‚  Ã‚  Ã‚  Ã‚  11,000 Cash at end of period$270,700 *EXERCISE 12-15 Cash payments for rentals Rent expense$ 30,000* Add: Increase in prepaid rent? ?3,100* Cash payments for rent$ 33,100* Cash payments for salaries Salaries expense$ 54,000* Add: Decrease in salaries payable? ?2,000* Cash payments for salaries$ 56,000* Cash receipts from customers Revenue from sales$160,000* Add: Decrease in accounts receivable 9,000* Cash receipts from customers$169,000* SOLUTIONS TO PROBLEMS |PROBLEM 12-1A | | | | |Cash Inflow, Outflow, or No Effect? | | | | | | |Transaction |Where Reported | | |(a) |Recorded depreciation |O |No cash flow effect | | |expense on the plant assets. | | | |(b) |Re corded and paid interest expense. |O |Cash outflow | |(c) |Recorded cash proceeds from a sale of plant assets. |I |Cash inflow | |(d) |Acquired land by issuing |NC |No cash flow effect | | |common stock. | | |(e) |Paid a cash dividend |F |Cash outflow | | |to preferred stockholders. | | | |(f) |Distributed a stock dividend |NC |No cash flow effect | | |to common stockholders. | | | |(g) |Recorded cash sales. |O |Cash inflow | |(h) |Recorded sales on account. O |No cash flow effect | |(i) |Purchased inventory for cash. |O |Cash outflow | |(j) |Purchased inventory on |O |No cash flow effect | | |account. | | | |PROBLEM 12-2A | (a)Net income can be determined by analyzing the retained earnings account. Retained earnings beginning of year$270,000 Add: Net income (plug) 60,500* 330,500 Less: Cash dividends20,000 Stock dividends 10,500 Retained earnings, end of year$300,000 ($300,000 + $10,500 + $20,000 – $270,000) (b)Cash inflow from the issue of stock was $14,500 ($165,000 à ¢â‚¬â€œ $140,000 – $10,500). Common Stock | |140,000 | | | |10,500 |Stock Dividend | | |14,500 |Shares Issued for Cash | | |165,000 | | Cash outflow for dividends was $20,000. The stock dividend does not use cash. c)Both of the above activities (issue of common stock and payment of dividends) would be classified as financing activities on the statement of cash flows. |PROBLEM 12-3A | GRIDER COMPANY Partial Statement of Cash Flows For the Year Ended November 30, 2010 Cash flows from operating activities Net income$1,650,000 Adjustments to reconcile net income to net cash provided by operating activities Depreciation expense$ 80,000 Decrease in inventory500,000 Decrease in accrued expenses payable  (100,000) Increase in prepaid expenses(150,000) Increase in accounts receivable(300,000) Decrease in accounts payable  (350,000)  Ã‚   (320,000) Net cash provided by operating activities$1,330,000 |*PROBLEM 12-4A | GRIDER COMPANYPartial Statement of Cash Flows For the Year End ed November 30, 2010 Cash flows from operating activities Cash receipts from customers$7,400,000(1) Less cash payments: To suppliers$4,750,000(2) For operating expenses? 1,320,000(3)? 6,070,000 Net cash provided by operating activities$1,330,000 Computations: (1)Cash receipts from customers Sales$7,700,000 Deduct: Increase in accounts receivable (300,000) Cash receipts from customers$7,400,000 (2)Cash payments to suppliers Cost of goods sold$4,900,000 Deduct: Decrease in inventories (500,000) Cost of purchases? 4,400,000 Add: Decrease in accounts payable 350,000 Cash payments to suppliers$4,750,000 3)Cash payments for operating expenses Operating expenses, exclusive of depreciation$1,070,000* Add: Increase in prepaid expenses$150,000 Decrease in accrued expenses payable100,000 250,000 Cash payments for operating expenses$1,320,000 *$450,000 + ($700,000 – $80,000) |PROBLEM 12-5A | JANTZEN COMPANY Partial Statement of Cash Flows For the Year Ended December 31, 2010 Cash fl ows from operating activities Net income$230,000 Adjustments to reconcile net income to net cash provided by operating activities Depreciation expense$70,000 Loss on sale of equipment16,000 Increase in accounts payable13,000Increase in income taxes payable 6,000 Increase in accounts receivable  (10,000) 95,000 Net cash provided by operating activities$325,000 |*PROBLEM 12-6A | JANTZEN COMPANY Partial Statement of Cash Flows For the Year Ended December 31, 2010 Cash flows from operating activities Cash receipts from customers$960,000(1) Less cash payments: For operating expenses$601,000(2) For income taxes 34,000(3)? 635,000 Net cash provided by operating activities$325,000 (1)Computation of cash receipts from customers Revenues$970,000 Deduct: Increase in accounts receivable ($70,000 – $60,000)? (10,000) Cash receipts from customers$960,000 2)Computation of cash payments for operating expenses Operating expenses per income statement$614,000 Deduct: Increase in accounts payable ($41,000 – $28,000)  Ã‚  Ã‚  (13,000) Cash payments for operating expenses$601,000 (3)Computation of cash payments for income taxes Income tax expense per income statement$ 40,000 Deduct: Increase in income taxes payable ($13,000 – $7,000)  Ã‚  Ã‚  Ã‚  Ã‚  (6,000) Cash payments for income taxes$ 34,000 |PROBLEM 12-7A | (a)TRAHAN COMPANY Statement of Cash Flows For the Year Ended December 31, 2010 Cash flows from operating activities Net income$32,000 Adjustments to reconcile net income o net cash provided by operating activities Depreciation expense$17,500* Increase in accounts payable? 9,000 Decrease in income taxes payable? (1,000) Increase in merchandise inventory(7,000) Increase in accounts receivable  (19,000)? (500) Net cash provided by operating activities31,500 Cash flows from investing activities Sale of equipment8,500 Cash flows from financing activities Issuance of common stock4,000 Redemption of bonds (6,000) Payment of dividends  (20,000 ) Net cash used by financing activities  (22,000) Net increase in cash18,000 Cash at beginning of period  Ã‚  20,000 Cash at end of period$38,000 *$32,000 – ($24,000 – $9,500(A)) = $17,500 A)$18,000 (cost of equipment) – $8,500 (book value) = $9,500 (accumulated depreciation for equipment sold) PROBLEM 12-7A (Continued) |(b) 1. |$31,500 |? |[pic] = 1. 17 times | | |[Per Part (a)] | | | *$15,000 + $8,000 **$24,000 + $7,000 2. $31,500 ? [pic] = . 55 times *$15,000 + $8,000 + $33,000 **$24,000 + $7,000 + $27,000 3. $31,500 – $0 – $20,000 = $11,500 |*PROBLEM 12-8A | (a)TRAHAN COMPANY Statement of Cash Flows For the Year Ended December 31, 2010 Cash flows from operating activitiesCash receipts from customers$223,000(1) Less cash payments: To suppliers$173,000(2) For operating expenses 6,500(3) For interest 3,000 For income taxes 9,000(4)? 191,500 Net cash provided by operating activities 31,500 Cash flows from investing activities Sale of equipmen t8,500 Cash flows from financing activities Issuance of common stock 4,000 Redemption of bonds (6,000) Payment of dividends? (20,000) Net cash used by financing activities? (22,000) Net decrease in cash 18,000 Cash at beginning of period 20,000 Cash at end of period$? 38,000 Computations: (1)Cash receipts from customers Sales$242,000 Deduct: Increase in accounts receivable  Ã‚  Ã‚  (19,000)Cash receipts from customers$223,000 *PROBLEM 12-8A (Continued) (2)Cash payments to suppliers Cost of goods sold$175,000 Add: Increase in inventory 7,000 Cost of purchases? 182,000 Deduct: Increase in accounts payable? ?9,000 Cash payments to suppliers$173,000 (3)Cash payments for operating expenses Operating expenses$24,000 Deduct: Depreciation $32,000 – ($24,000 – $9,500*)  Ã‚  17,500 Cash payments for operating expenses$ 6,500 *$18,000 – $8,500 = $9,500 (4)Cash payments for income taxes Income tax expense$8,000 Add: Decrease in income taxes payable 1,000 Cash payments for income taxes$9,000 |(b) 1. |$31,500 |? |[pic] = 1. 7 times | | |[Per Part (a)] | | | **$15,000 + $8,000 ***$24,000 + $7,000 2. $31,500 ? [pic] = . 55 times *$15,000 + $8,000 + $33,000 **$24,000 + $7,000 + $27,000 3. $31,500 – $0 – $20,000 = $11,500 |PROBLEM 12-9A | CIPRA INC. Statement of Cash Flows For the Year Ended December 31, 2010 Cash flows from operating activities Net income$158,900 Adjustments to reconcile net income to net cash provided by operating activities Depreciation expense$46,500Increase in accounts payable 34,700 Loss on sale of plant assets7,500 Decrease in accrued expenses payable (500) Increase in prepaid expenses? (2,400) Increase in inventory? (9,650) Increase in accounts receivable  (54,800)? 21,350 Net cash provided by operating activities? 180,250 Cash flows from investing activities Sale of plant assets1,500 Purchase of investments (24,000) Purchase of plant assets (100,000) Net cash used by investing activities(122,500) Cash flo ws from financing activities Sale of common stock45,000 Payment of cash dividends (30,350) Redemption of bonds (40,000) Net cash used by financing activities (25,350)Net increase in cash 32,400 Cash at beginning of period 48,400 Cash at end of period$? 80,800 |*PROBLEM 12-10A | CIPRA INC. Statement of Cash Flows For the Year Ended December 31, 2010 Cash flows from operating activities Cash receipts from customers$337,980(1) Less cash payments: To suppliers$110,410(2) For income taxes 27,280 For operating expenses 15,310(3) For interest 4,730? 157,730 Net cash provided by operating activities? 180,250 Cash flows from investing activities Sale of plant assets 1,500 Purchase of investments? (24,000) Purchase of plant assets (100,000) Net cash used by investing ? activities(122,500) Cash flows from financing activities Sale of common stock 45,000 Payment of cash dividends? (30,350) Redemption of bonds? (40,000) Net cash used by financing activities (25,350) Net increase in cash 32,40 0 Cash at beginning of period 48,400 Cash at end of period$? 80,800 Computations: (1)Cash receipts from customers Sales$392,780 Deduct: Increase in accounts receivable  Ã‚  Ã‚  (54,800) Cash receipts from customers$337,980 *PROBLEM 12-10A (Continued) (2)Cash payments to suppliers Cost of goods sold$135,460 Add: Increase in inventory 9,650 Cost of purchases? 145,110 Deduct: Increase in accounts payable? (34,700)Cash payments to suppliers$110,410 (3)Cash payments for operating expenses Operating expenses exclusive of depreciation$12,410 Add: Increase in prepaid expenses$2,400 Decrease in accrued expenses payable 500 2,900 Cash payment for operating expenses$15,310 |PROBLEM 12-11A | MERCADO COMPANY Statement of Cash Flows For the Year Ended December 31, 2010 Cash flows from operating activities Net income$ 37,000 Adjustments to reconcile net income to net cash provided by operating activities Depreciation expense$42,000 Decrease in accounts receivable? 12,000 Decrease in prepaid ex penses 5,720 Increase in accounts payable? ,730 Loss on sale of equipment2,000 Increase in inventory  Ã‚   (9,450)? 57,000 Net cash provided by operating activities? 94,000 Cash flows from investing activities Sale of land? 25,000 Sale of equipment? 8,000 Purchase of equipment(95,000) Net cash used by investing activities? (62,000) Cash flows from financing activities Payment of cash dividends  (12,000) Net cash used by financing activities  (12,000) Net increase in cash20,000 Cash at beginning of period? 45,000 Cash at end of period$65,000 Noncash investing and financing activities Conversion of bonds by issuance of common stock$40,000 |PROBLEM 12-12A | | | |Current Cash Debt Coverage | | | | | |Ratio |Cash Debt Coverage Ratio | | | |Free Cash Flow ($125,000) |(0. 5 times) |(0. 3 times) | | | | | | | | |Transaction | | | | |(a) |Recorded credit sales $2,500. |NE |NE |NE | |(b) |Collected $1,500 owing from customers. I |I |I | |(c) |Paid amount owing |D |D |D | | |to supp liers, $2,750. | | | | |(d) |Recorded sales returns of $500 and credited the |NE |NE |NE | | |customer’s account. | | | | |(e) |Purchased new equipment $5,000; signed a long-term |D* |NE |D | | |note payable for the cost of the equipment. | | | |(f) |Purchased a patent and paid $15,000 cash for the |D |NE |NE | | |asset. | | | | *Note to Instructor: If only cash capital expenditures are deducted, this answer would be NE. |BYP 12-1 FINANCIAL REPORTING PROBLEM | (a)Net cash provided by operating activities: 2007 $90,064 2006 $55,656Some causes of the significant changes in net cash provided by operating activities during 2007 were the decrease in the accounts receivable, a decrease in inventories, and a decrease in income taxes payable and deferred. (b)The increase in cash and cash equivalents for the year ended December 31, 2007 was $1,877,000. (c)Tootsie Roll uses the indirect method of computing and presenting the net cash provided by operating activities. (d)According to t he statement of cash flows, accounts receivable decreased $2,591,000 in 2007. Inventories decreased $6,506,000 in 2007. Accounts payable (and accrued liabilities) decreased $3,234,000 in 2007. (e)The net cash used by investing activities in 2007 was $43,345,000. (f)The supplemental disclosure of cash flow information disclosed interest paid of $537,000 and income taxes paid of $11,343,000 in 2007. BYP 12-2 COMPARATIVE ANALYSIS PROBLEM | |(a) | | | |Hershey | |Tootsie Roll | | | | | | | | | | |1. |Current cash | |[pic] | |[pic] | | | |debt coverage | |= . 51 times | |= 1. 0 times | | | |ratio | | | | | | | | | | | | | | |2. |Cash debt | |[pic] | |[pic]= . 54 times | | | |coverage ratio | |= . 22 times | | | **$57,972 + $116,523 **$62,211 + $98,747 (b)Tootsie Roll’s current cash debt coverage ratio provides a ratio of $1. 50 of cash from operations for every dollar of current debt.It is a better representation of liquidity on an average day than the current ratio. Tootsie Ro ll’s higher ratio (1. 50 vs. .51) indicates Tootsie Roll was significantly more liquid in 2007 than Hershey but both measures are acceptable. The cash debt coverage ratio shows a company’s ability to repay its liabilities from cash generated from operating activities without having to liquidate the assets employed in its operations. Since Tootsie Roll’s cash debt coverage ratio was more than twice as large (. 54 vs. .22) as Hershey’s, Tootsie Roll’s ability to repay liabilities with cash from operations was significantly greater than Hershey’s in 2007. BYP 12-3 RESEARCH CASE | (a)The article suggests that most people aren’t concerned about Sears’s liquidity. Instead, the concern is that the company won’t have adequate cash to implement the changes it needs to make a return to profitability. Also, some investors were concerned that a cash shortage will reduce Sears’s ability to carry out the treasury stock buyback program that it had previously announced. (b) At the time of the article, Sears had not reported its cash flow numbers. It had, however, reported an estimate that by the end of the quarter the company would have $1 billion in cash on hand. This was lower that analysts had expected.Based upon estimates of amounts that the company had spent on treasury stock, debt repayment, and capital expenditures, analysts determined that it was likely that, to arrive at $1 billion in cash on hand, the company’s cash flow must have declined. (c)Individuals who tried to defend Sears said that they thought it was inappropriate to make such negative statements about the company based on estimates. They suggested it would be better to wait until the company reports its actual cash flow numbers before evaluating the company. (d)The article suggests that, if, in fact, Sears’s cash flow is declining, it is a bad time of year for that to be happening. Normally the fourth quarter would be a p eriod when cash flows would be strong, because of the holiday shopping season.In contrast, Sears frequently experiences negative cash from operations during the first three quarters of the year. |BYP 12-4 INTERPRETING FINANCIAL STATEMENTS | (a)Current ratio—2001:$1,207. 9? $ 921. 4= 1. 31 —2004:$2,539. 4? $1,620. 4= 1. 57 Current cash debt ?coverage ratio—2001:($119. 8)? $ 948. 2= (. 13) times —2004: $566. 6? $1,436. 6= . 39 times Both Amazon’s current ratio and its current cash debt coverage ratio improved dramatically from 2001 to 2004. Amazon’s current ratio increased by 20% (from 1. 31 to 1. 57) during the 3-year period.In addition Amazon’s current cash debt coverage ratio improved by $. 52 per dollar of current liabilities (from a negative $. 13 per dollar in 2001 to a positive $. 39 per dollar in 2004). Amazon’s liquidity improved greatly from 2001 to 2004. (b)Cash debt ?coverage ratio—2001:($119. 8)? $3,090. 0= ( . 04) times —2004: $566. 6? $4,773. 4= . 12 times Debt to total ?assets ratio—2001:$3,077. 5? $1,637. 5= 1. 88 —2004:$5,096. 1? $3,248. 5= 1. 57 Amazon’s solvency also improved significantly from 2001 to 2004. Its cash debt coverage ratio increased by $. 16 per dollar of total liabilities during the 3-year period. Amazon’s debt to total assets ratio also improved (decreased) by 16% from 2001 to 2004. c)Free cash flow—2001:($119. 8)–$50. 3 – $0= ($170. 1) —2004: $566. 6–$89. 1 – $0= $477. 5 Amazon’s free cash flow increased by almost $650 million from 2001 to 2004. The increase was caused by Amazon finally generating a profit in 2004. If Amazon is able to continue operating at a profit and producing a large free cash flow, it should be able to finance an expansion of its operations. BYP 12-4 (Continued) (d)While these measures tell us a lot about Amazon. com, they don’t tell us whether the stoc k price is reasonable. Amazon. com’s high stock price is a reflection of a belief by investors that Amazon. com will continue to grow incredibly fast.If this growth falters, its stock price will fall rather quickly. Also, Amazon. com’s heavy reliance on debt financing compounds the risk of investing in its stock because it may have a difficult time paying its debts if its growth does not continue. |BYP 12-5 FINANCIAL ANALYSIS ON THE WEB | Answers will vary depending on the company chosen by the student. |BYP 12-6 DECISION MAKING ACROSS THE ORGANIZATION | (a)DEVITO COMPANY Statement of Cash Flows For the Year Ended January 31, 2010Cash flows from operating activities Net loss$(35,000)* Adjustments to reconcile net income to net cash provided by operating activities Depreciation expense$? 55,000 Gain from sale of investment? ?(5,000)50,000 Net cash provided by operating activities15,000 Cash flows from investing activities Sale of investment 80,000 Purchase of inves tment ? (75,000) Purchase of fixtures and equipment  (320,000) Net cash used by investing activities(315,000)* Cash flows from financing activities Sale of capital stock? 405,000 Purchase of treasury stock? (10,000) Net cash provided by financing activities395,000 Net increase in cash 95,000 Cash at beginning of period? 40,000 Cash at end of period$235,000 Noncash investing and financing activities Issuance of note for truck$20,000 BYP 12-6 (Continued) *Computation of net income (loss) Sales of merchandise$385,000 Interest revenue 6,000 Gain on sale of investm