'Kimmel Financial Accounting Solutions Ch12\r'

'CHAPTER 12 asseveproportionn of bills feeds Study Objectives 1. Indicate the usefulness of the literary argument of potpourri in rate of mensess. 2. get a line among operate, invest, and financial support activities. 3. Explain the usurpation of the w be life cycle on a every(prenominal)iance’s hard gold coalesces. 4. piss a averment of specie adverts using the in convey order. 5. Use the story of hard feels flows to evaluate a companionship. *6. germinate a instruction of hard interchange flows using the guide on method acting. thickset of Questions by Study Objectives and Bloom’s Taxonomy | point | |? 1. | |? 1. | |? 1. | |? 1. |? 1. | |? 1. |2 |C |? 4|6* |AP|? 7. | | | | |. | | | | | | | | | | | | |1A | |Distinguish among in ope proportionalityn(p), investiture, and financial support | | undecomposable | |10â€15 | | | |activities. | | | | | | | | | | | | |2A | | visualize currency flow exits of changes in hardlyice acc ounts. | | sincere | |10â€15 | | | | | | | | | |3A | | wee the operate activities segmentation†con sloshedative method. |Simple | |20â€30 | | | | | | | | | |*4A | |Prepare the in ope symmetryn(p) activities partitioningâ€direct method. | |Simple | |20â€30 | | | | | | | | | |5A | |Prepare the direct activities section†substantiating method. |Simple | |20â€30 | | | | | | | | | |*6A | |Prepare the direct activities sectionâ€direct method. | |Simple | |20â€30 | | | | | | | | | |7A | |Prepare a tilt of outstanding flowsâ€indirect method, and compute immediate payment-based balances. | fit | |40â€50 | | | | | | | | | |*8A | |Prepare a control of change flowsâ€direct method, and compute interchange-based ratios. | | lead | |40â€50 | | | | | | | | | |9A | |Prepare a statement of immediate payment flowsâ€indirect method. |Moderate | |40â€50 | | | | | | | | | |*10A | |Prepare a statement of immediate payment flowsâ€direct met hod. | |Moderate | |40â€50 | | | | | | | | | |11A | |Prepare a statement of coin flowsâ€indirect method. | |Moderate | 40â€50 | | | | | | | | | |12A | |Identify the impact of proceedings on ratios. | |Moderate | |25â€35 | | | | | | | | | |1B | |Distinguish among direct(a), drop, and support | |Simple | |10â€15 | | | |activities. | | | | | | | | | | | | |2B | |Determine coin flow effects of changes in found asset | |Simple | |10â€15 | | | |accounts. | | | | | | | | | | | | | |3B | |Prepare the run activities sectionâ€indirect method. |Simple | |20â€30 | | | | | | | | | |*4B | |Prepare the run activities sectionâ€direct method. | |Simple | |20â€30 | | | | | | | | | |5B | |Prepare the run(a) activities sectionâ€indirect method. |Simple | |20â€30 | | | | | | | | | |*6B | |Prepare the operate(a) activities sectionâ€direct method. | |Simple | |20â€30 | | | | | | | | | |7B | |Prepare a statement of specie flowsâ€indirect method, and compute specie-based ratios. |Moderate | |40â€50 | | | | | | | | | ASSIGNMENT CHARACTERISTICS TABLE (Continued) | riddle | | | |Difficulty | |Time | |Number | |Description | | direct | |Allotted (min. | | | | | | | | | |*8B | |Prepare a statement of coin flowsâ€direct method, and compute coin-based ratios. | |Moderate | |40â€50 | | | | | | | | | |9B | |Prepare a statement of bills flowsâ€indirect method. |Moderate | |40â€50 | | | | | | | | | |*10B | |Prepare a statement of immediate payment flowsâ€direct method. | |Moderate | |40â€50 | | | | | | | | | |11B | |Prepare a statement of hard currency in flowsâ€indirect method. | |Moderate | |40â€50 | | | | | | | | |ANSWERS TO QUESTIONS ?1. (a)The statement of exchange flows reports the nones taxation, currency defrayals, and loot change in coin resulting from the operate, place, and support activities of a gild during a occlusion of time in a change that adapts the start out and concl usioning property balances. (b)Disagree. The statement of specie flows is required. It is the fourth basic financial statement. ?2. The statement of coin flows answers the following questions nearly immediate payment in: (a) Where did the specie bob up from during the plosive consonant? (b) What was the coin utilize for during the block? nd (c) What was the change in the gold balance during the period? ?3. The three activities are: operate activities admit the notes effects of transactions that create revenues and disbursals and thus come out into the determination of boodle income. Investing activities include: (a) acquire and disposing of investitures and fruitful long-lived assets and (b) l kiboshing money and compendium loans. funding activities include: (a) obtaining coin from issuing debt and re pay falls borrowed and (b) obtaining money from sourceholders, repurchasing shares, and paying them dividends. ?4. a)Major sources of cap in a statement of bullion flows include immediate payment from operations; topic of debt; collection of loans; military issue of capital telephone circuit; exchanges agreement of enthronizations; and the exchange of property, kit and boodle, and equipment. (b)Major uses of exchange include purchase of inscription, payment of cash dividends; repurchase of debt; purchase of investments; making loans; redemption of capital deport; and the purchase of property, lay out, and equipment. ?5. The statement of cash flows presents investment and support activities so that even noncash transactions of an put and financial backing nature are discover in the financial statements.If they affect financial conditions no parvenueorthyly, the FASB requires that they be disclosed in either a illuminate schedule at the bottom of the statement of cash flows or in a separate punctuate or supplementary schedule to the financial statements. ?6. Examples of signifi go offt noncash activities are: ( 1) issuance of commonplace for assets, (2) conversion of bonds into cat valium personal credit line, (3) issuance of bonds or notes for assets, and (4) noncash exchanges of property, dress, and equipment. ?7. Comparative balance sheets, a real income statement, and certain transaction data all provide breeding necessary for preparation of the statement of cash flows.Comparative balance sheets indicate how assets, liabilities, and equities rent changed during the period. A electric authoritative income statement provides information about the amount of cash provided or use by operations. authorized transactions provide additional detailed information needed to determine how cash was provided or use during the period. ?8. (a)The levels of the corporate life cycle are the opening phase, appendage phase, maturity phase, and decline phase. (b)During the introductory phase, cash from operations and drop would be expected to be negative, and cash from support would be coerc ive.Questions Chapter 12 (Continued) During the maturation phase, a troupe would be expected to appearing some small amounts of cash from operations sequence continuing to show negative cash from place and affirmatory cash from backing. During the maturity phase, cash from operations, place, and backing would all be expected to be positive dapple in the decline phase, cash from operations and drop would tolerate to be positive while cash from pay would be negative. ?9. Tootsie chronicle has positive cash from operations that outmatchs its unclutter income. property from operations exceeded its place needs and it retired shares of stock and gainful dividends. Tootsie Roll appears to be in the middle to previous(a) maturity phase. 10. The expediency of the direct method is that it presents the major categories of cash improvement and cash payments in a format that is connatural to the income statement and familiar to statement users. Its principal mischief is tha t the necessary data can be pricy and time-consuming to accumulate. The advantage of the indirect method is it is a great deal considered easier o prepare, and it provides a reconciliation of meshwork income to concluding cash provided by run activities. It to a fault tends to damp less company information to competitors. Its primary detriment is the difficulty in understanding the adjustments that comprise the reconciliation. twain methods are acceptable just now the FASB expressed a preference for the direct method. Yet, the indirect method is the enkindle favorite of companies. 11. When gibe cash influxs exceed total cash outflows, the excess is identified as a â€Å" clear gain in cash” near(a) the bottom of the statement of cash flows. 12.The indirect method involves exchangeing collection authorize income to crystalise cash provided by run activities. This is done by starting with accretion net income and adjusting for items that do not affect cash. Ex amples of adjustments include dispraise and separate noncash depreciates, gains and losses on the barter of noncurrent assets, and changes in the balances of current asset and current li energy 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 enlarge in accounts due. If accounts receivable emergence during the period, revenues describe on the accrual basis would be high than the actual cash revenues received. Thus, accrual-basis net income moldiness be adjusted to reflect the net cash provided by direct activities. 14. A number of factors could have cause an increase in cash despite the net loss. These are (1) high cash revenues relative to low cash spendings; (2) sales of property, plant, and equipment; (3) sales of investments; (4) issuance of debt or capital stock, and (5) unlikenesss between cash and accrual accounting, e. . depreciation. 15. derogation expenditure. earn or loss on sale of a noncurrent asset. add-on/ slump in accounts receivable. extend/decrease in memorandum. gain/decrease in accounts collectable. Questions Chapter 12 (Continued) 16. Under the indirect method, depreciation is added pricker to net income to military issue root net income to net cash provided by direct 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, opinionors, and other users about: (1) the company’s ability to generate future cash flows, (2) the company’s ability to pay dividends and refer obligations, (3) the reasons for the difference between net income and net cash provided by operational 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 due through issuance of common stock, $1,700,000. 19. (a)The current ratio is an accrual-based ratio that measures fluidity while the current cash debt insurance reportage ratio is a cash-based ratio that measures liquidity. (b)Solvency can be metrical by the debt to total assets ratio (accrual-based) or the cash debt insurance coverage ratio (cash-based). *20. network cash provided by operating activities under the direct nest is the difference between cash revenues and cash 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. | | | | | | + decrement in accounts receivable | |*21. |(a) | bills put across from customers = Revenues from sales | | | | | | | | | | â€ join on in accounts receivable | | | | | | | | | | | | |  + sum up in schedule | | |(b) | grease ones palmss = Cost of goods interchange | | | | | | | | | | â€ drop-off in inventory | | | | | | | | | | | | | + ebb in accounts collectable | | | | change payments to suppliers = acquires | | | | | | | | | | â€ addition in accounts account collectable | | | | | | | | 22. deals$2,000,000 supplement: Decrease in accounts receivables 100,000 exchange tax income from customers$2,100,000 *23. dispraise expense is not listed in the direct method operating activities section because it is not a cash flow itemâ€it does not affect cash. SOLUTIONS TO truncated processS design exemplar 12-1 (a) hard cash inflow from financing operation, $200,000. (b) change outflow from investing practise, $150,000. (c) immediate payment inflow from investing activity, $20,000. (d) funds outflow from financing activity, $50,000. picture make 12-2 (a)Investing activity. (d) operate activity. (b)Investing activity. (e)Financing activity. (c)Financing activity. (f)Financing activity. apprize drill 12-3 currency flows from financing activities Proceeds from issuance of bonds due$300,000) compensation of dividends(70,000) light up cash provided by financing activities$230,000) sketch physical exercise 12-4 (a) funds from operations would be inflict than net income during the reaping phase because inventory moldiness 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 chuck out behind sales; thus, accrual sales would exceed cash collections during the period. (b) bullion from investing is often positive during the late maturity phase and the decline phase because the firm whitethorn sell off excess long-term assets that are no longer needed for productive purposes. BRIEF EXERCISE 12-5 boodle cash provided by operating activities is $2,680,000. Using the indirect approach, the solution is: crystalize income$2,500,000 Adjustments to adjudicate net income ?? to net cash provided by operating ?? activities wear and tear expense$110,000) Accounts receivable decrease? 350,000) Accounts account collectible decrease(280,000)?? 180,000 crystallise cash provided by operating ?? activities$2,680,000 BRIEF EXERCISE 12-6 bills flows from operating activities clear income$280,000 Adjustments to manufacture 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 Adjustments to reconcile net income to net ?? cash provided by operating activities Decrease in accounts receivable$80,000) accession in prepay expenses(28,000) cast up in inventories(40,000)?? 12,000 Net cash provided by operating ?? activities$212,000 BRIEF EXERCISE 12-8 Original cost of equipment sell$22,000 less(prenominal): Accumulated depreciation?? 5,500 record take to be of equipment interchange? 16,500 slight: Loss on sale of equipment?? 3,500 hard cash 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 quantify (c) bullion debt coverage ratio = $127,260,000 ? $928,464,500 = . 14 generation 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 measure (c) property debt coverage ratio = $405,000 ? $225,000 = 1. 8 quantify 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 easy cash flow that remote exceeds its dividend, an increase in the dividend might be possible. However, other factors should be considered. For example, it must have nice hold pelf, and it should be convinced that a larger dividend can be sustained over future twelvemonths. It should likewise use the disengage cash flow to dramatize its operations or pay down its debt. *BRIEF EXERCISE 12-13 | | | | | | + Decrease in accounts receivable | | pass on from |= | gross sales | | | | | |customers | |revenues | | | | | | | | | | | | †enlarge in accounts receivable | | | | | | | | | $1,285,759,000 = $1,287,672,000 †$1,913,000 ( addition in accounts receivable) *BRIEF EXERCISE 12-14 | | | | | | + Decrease in income taxes collectible | | interchange payment |= |Income Tax | | | | | |for income taxes | |Expense | | | | | | | | | | | | †Increase in income taxes collectible | | | | | | | | | $125,000,000 = $370,000,000 †$245,000,000* *$522,000,000 †$277,000,000 = $245,000,000 (Increase in income taxes collectable) *BRIEF EXERCISE 12-15 | | | | | | + Increase in prepay expenses | | | | | | | | | | hard currency |= | in operation(p) | | | | †Decrease in prepaid expenses | |payments for | |expenses, | | | | | |operating | |excluding | | | | | |expenses | |depreciation | | | | | | | | | | | | | | | | | | | |and       | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | + Decrease in accumulated expenses payable | | | | | | | | | | | | | | | | †Increase in accrued expenses payable | | | | | | | | | $79,000 = $90,000 †$6,600 †$4,400 SOLUTIONS TO DO IT! check into EXERCISES DO IT! 12-1 (1)Financing activity (2) direct activity (3)Financing activity (4)Investing activity (5)Investing activity DO IT! 12-2 notes flows from operating activities Net income$100,000 Adjustments to reconcile net income to n et cash provided by operating activities: Depreciation expense$6,000 Patent amortisation expense2,000 Gain on sale of equipment(3,600) Decrease in accounts receivable6,000 Increase in accounts payable  3,200    13,600 Net cash provided by operating activities$113,600 DO IT! 12-3 (a) Free cash flow = $73,700 †$27,000 â€$15,000 = $31,700 b) change 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 measuring rod of free cash flow provides additional brainstorm 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) operational activities. (g)Operating activities. EXER CISE 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 | | manakin | | | | | |A | |Introductory phase | |B | | redress 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 (Continue d) During the maturity phase (point C), cash from operations and net income would be rough the same. immediate payment from operations would exceed investing needs. In the decline phase (point B), cash from operations would return while cash from financing would be negative. EXERCISE 12-4 JEREZ party overtone rumor of currency Flows For the form finish declination 31, 2010 hard currency 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(p) arguing of interchange Flows For the stratum finish celestial latitude 31, 2010 capital flows from operating activities Net income$153,000 Adjustments 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 direction of funds Flowsâ€Indirect system For the Year finish December 31, 2010 bills 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    (3,700) Increase in accounts receivable(8,200) Increase in inventory  (11,000)  168,800 Net cash provided by operating activities452,900 cash in flows from investing activities Sale of lower    35,000 grease ones palms of building (129,000) Net cash used by investing activities(94,000) bullion flows from financing activities Issuance of bonds200,000 requital of dividend  (12,000) Purchase of exchequer stock   (32,000) Net cash provided by financing activities  156,000 Net increase in cash514,900 Cash at spring of period    45,000 Cash at end of period$559,900 EXERCISE 12-7 TOVAR CORP regionial Statement of Cash Flows For the Year stop December 31, 2010 Cash flows from operating activities Net income$? 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 requital of cash dividends? (19,000) *Cost of equipment sold$49,000) *Accumulated depreciation (30,000)) *Bo ok 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$34,000) Decrease in inventory? 19,000)Increase in accounts receivable? (9,000) Decrease in accounts payable(8,000)?? 36,000) Net cash provided by operating ?? activities? 129,000) Cash flows from investing activities Sale of land? 20,000) Purchase of equipment(60,000) Net cash used by investing ?? activities? (40,000) Cash flows from financing activities Issuance of common stock? 42,000) Payment of cash dividends (35,000) Redemption of bonds (50,000) Net cash used by financing ?? activities? (43,000) Net increase in cash?? 46,000) Cash at starting of period?? 22,000) Cash at end of period$? 68,000) EXERCISE 12-8 (Continued) (b)1. Current cash debt cove rage ratio: |Net cash provided |? honest current | |by operating activities | |liabilities | |$129,000 |? |[pic] |= |3. 0 multiplication | |[Per Part (a)] | | | | | 2. Cash debt coverage ratio: |Net cash provided |? |Average total | |by operating activities | |liabilities | $129,000 ? [pic] = . 59 propagation *$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 high ( fracture) 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 it s cash debt coverage ratio is higher but its free cash flow smaller. EXERCISE 12-10 | | |Hoyt | |Rex | | | | | passel | |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 ( cleanse) than Rex’s similar 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) educe: Increase in accounts receivable(70,000) Cash rec eipts from customers*$122,000 Operating expenses?? 83,000) infer: Increase in accounts payable(23,000) Cash payments for operating expenses**?? 60,000 Net cash provided by operating activities$? 62,000 |** |Accounts Receivable | | |Balance, Beginning of family ??? ??   | | | |Revenues for the category 192,000  | Cash receipts for social class 122,000 | | |Balance, End of division ? 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 together: 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 scoop shovel ?? of depreciation ?? ($11,791. 6 †$1,249. 9)$10,541. 7mi llionDeduct: Decrease in prepaid expenses$(204. 5) Increase in accrued ?? expenses payable (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 intersection$105,000 For salaries and wages? 53,000 For operating expenses? 28,000 For income taxes? 12,000 For quest    10,000? 208,000* Net cash provided by operating ?? activities$? 50,000* *$48,000 + $192,000 *EXERCISE 12-14 MOSQUITO HOLLOW CORP. Statement of Cash Flowsâ€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    22,400  471,500 Net cash provided by operating activities94,600 Cash flows form investing activities Sale of buildin g202,400 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    75,900 Net increase in cash259,700Cash at beginning of period     11,000 Cash at end of period$270,700 *EXERCISE 12-15 Cash payments for rentals Rent expense$ 30,000* conduct: Increase in prepaid rent? ?3,100* Cash payments for rent$ 33,100* Cash payments for salaries Salaries expense$ 54,000* extend: 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 report | | |(a) |Recorded depreciation |O |No cash flow effect | | |expense on the plant assets. | | | |(b) |Recorded 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) | compensable a cash dividend |F |Cash outflow | | |to like 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. | | | | fuss 12-2A | (a)Net income can be situated 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 filiation 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 †$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. | chore 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)   (320,000) Net cash provided by operating ac tivities$1,330,000 |* job 12-4A | GRIDER COMPANYPartial Statement of Cash Flows For the Year Ended 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 flows 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)   (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 †$7,000)     (6,000) Cash payments for income taxes$ 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 equipment8,5 00 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  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$173,000(2) For operating expenses??? 6,500(3) For interest??? 3,000 For income taxes??? 9,000(4)? 191,500 Net cash provided by ?? operating activities?? 31,500 Cash flows from investing activities Sale of equipment8,500 Cash flows from financing activities Issuance of common stock 4,000 Redemption of bonds (6,000) Payment of dividends? (20,000) Net cash used by financing ?? activities? (22,000) Net decrease in cash?? 18,000 Cash at beginning of period?? 20,000 Cash at end of period$? 38,000 Computations: (1)Cash receipts from customers Sales$242,000 Deduct: Increase in accounts receivable   (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 †$9,500*)  17,500 Cash payments for operating expenses$ 6,500 *$18,000 â₠¬ $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$46,500Increase in accounts payable?? 34,700 Loss on sale of plant assets7,500 Decrease in accrued expenses payable ?? (500) Increase in prepaid expenses? (2,400) Increase in inventory? (9,650) Increase in accounts receivable (54,800)? 21,350 Net cash provided by operating ?? activities? 180,250 Cash flows from investing activities Sal e of plant assets1,500 Purchase of investments (24,000) Purchase of plant assets (100,000) Net cash used by investing ?? activities(122,500) Cash flows from financing activities Sale of common stock45,000 Payment of cash dividends (30,350) Redemption of bonds (40,000) Net cash used by financing ?? activities (25,350)Net increase in cash?? 32,400 Cash at beginning of period?? 48,400 Cash at end of period$? 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$110,410(2) For income taxes?? 27,280 For operating expenses?? 15,310(3) For interest??? 4,730? 157,730 Net cash provided by operating ?? activities? 180,250 Cash flows from investing activities Sale of plant assets?? 1,500 Purchase of investments? (24,000) Purchase of plant assets (100,000) Net cash used by investing ? activities(122,500) Cash flows from financing activities Sa le of common stock?? 45,000 Payment of cash dividends? (30,350) Redemption of bonds? (40,000) Net cash used by financing ?? activities?? (25,350) Net increase in cash?? 32,400 Cash at beginning of period?? 48,400 Cash at end of period$? 80,800 Computations: (1)Cash receipts from customers Sales$392,780 Deduct: Increase in accounts receivable   (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$15,310 |PROBLEM 12-11A | MERCADO COMPANY Statement of Cash Flows For the Year Ended December 31, 2010 Cash flows from operating activities Net income$ 3 7,000 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 expenses?? 5,720 Increase in accounts payable? ,730 Loss on sale of equipment2,000 Increase in inventory   (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 vicissitude 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) | self-possessed $1,500 owing from customers. I |I |I | |(c) |Paid amount owing |D |D |D | | |to suppliers, $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 pecuniary 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 cas h 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 the statement of cash flows, accounts receivable change magnitude $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 curr ent 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 Roll’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 great deal aren’t touch oned about Sears’s liquidity. Instead, the concern is that the company won’t ha ve 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 repurchase 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 evaluate that by the end of the fourth 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 public opinion 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 a ctual 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 period 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 understand FINANCIAL STATEMENTS | (a)Current ratioâ€2001:$1,207. 9? $ 921. 4= 1. 31 â€2004:$2,539. 4? $1,620. 4= 1. 57 Current cash debt ?coverage ratioâ€2001:($119. 8)? $ 948. 2= (. 13) times â€2004: $566. 6? $1,436. 6= . 39 times Both virago’s current ratio and its current cash debt coverage ratio amend 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 virago’s current cash debt coverage ratio improved by $. 52 per dollar of current liabili ties (from a negative $. 13 per dollar in 2001 to a positive $. 39 per dollar in 2004). virago’s liquidity improved greatly from 2001 to 2004. (b)Cash debt ?coverage ratioâ€2001:($119. 8)? $3,090. 0= (. 04) times â€2004: $566. 6? $4,773. 4= . 12 times Debt to total ?assets ratioâ€2001:$3,077. 5? $1,637. 5= 1. 88 â€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 flowâ€2001:($119. 8)â€$50. 3 †$0= ($170. 1) â€2004: $566. 6â€$89. 1 †$0= $477. 5 Amazon’s free cash flow increased by almost $650 million from 2001 to 2004. The increase was caused by Amazon finally generating a profit in 2004. If Amazon is able to continue operating at a profit and producing a large free cash flo w, it should be able to finance an expanding upon of its operations. BYP 12-4 (Continued) (d)While these measures tell us a lot about Amazon. com, they don’t tell us whether the stock set is reasonable. Amazon. com’s high stock price is a reflection of a belief by investors that Amazon. com will continue to grow incredibly fast.If this growth falters, its stock price will fall sooner quickly. Also, Amazon. com’s heavy reliance on debt financing compounds the risk of investing in its stock because it may have a difficult time paying its debts if its growth does not continue. |BYP 12-5 FINANCIAL ANALYSIS ON THE WEB | Answers will vary depending on the company chosen by the student. |BYP 12-6 DECISION MAKING crossways THE ORGANIZATION | (a)DEVITO COMPANY Statement of Cash Flows For the Year Ended January 31, 2010Cash flows from operating activities Net loss$(35,000)* Adjustments to reconcile net income ?? to net cash provided by operating ?? activities Depreci ation 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 investment ? (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 involution revenue??? 6,000 Gain on sale of investm\r\n'