CH 13-OverviewCHAPTER 13STATEMENT OF CASH FLOWSOVERVIEW OF BRIEF
EXERCISES, EXERCISES, PROBLEMS, AND CRITICAL THINKING
CASESBriefLearningExercisesTopicObjectivesSkillsB. Ex. 13.1Cash
flows from operations (direct)3AnalysisB. Ex. 13.2Cash flows from
operations (indirect)7AnalysisB. Ex. 13.3Cash flows from operations
(direct)3AnalysisB. Ex. 13.4Cash flows from operations
(indirect)7AnalysisB. Ex. 13.5Cash flows from investing
activities4AnalysisB. Ex. 13.6Cash flows from financing
activities4AnalysisB. Ex. 13.7Cash payment for goods3AnalysisB. Ex.
13.8Determining beginning cash balance2AnalysisB. Ex.
13.9Reconciling profit to cash from operations6AnalysisB. Ex.
13.10Prepare statement of cash flows2AnalysisLearning
ObjectivesExercisesTopicSkills13.1Using a cash flow statement1,
2Analysis, communication13.2Using a cash flow statement1, 2,
6Analysis, communication13.3Using noncash accounts to compute cash
flows4Analysis13.4Relationship between accrual and cash flows3,
6Analysis, communication13.5Accrual versus cash
flows3Analysis13.6Investing activities and interest revenue3,
6Communication13.7Format of a cash flow statement2Analysis13.8Cash
effects of business strategies8Analysis, communication,
judgment13.9Indirect method6, 7Analysis, communication13.10Indirect
method7Analysis13.11Classification of cash
flows2Analysis13.12Classification of cash flows2Analysis13.13Cash
flows from investing activities4Analysis, communication,
judgment13.14Cash flows from financing activities4Analysis,
communication, judgment13.15Real World: adidas AG, Herzogenaurach1,
2, 4Analysis, communication, judgment, research
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CH 13-Overview (p.2)ProblemsLearningSets A,
BTopicObjectivesSkills13.1 A,BPreparing a statement of cash
flowsdirect method (short)24Analysis13.2 A,BInvesting
activities4Analysis13.3 A,BInvesting activities4Analysis,
communication, judgment13.4 A,BCash flow from operating
activitiesdirect method3, 8Analysis, communication, judgment13.5
A,BCash flow from operating activitiesindirect method6, 7Analysis,
communication, judgment13.6 A,BPreparing a statement of cash
flowsdirect method; comprehensive24, 6, 8Analysis, communication,
judgment13.7 A,BPreparing a worksheet and statementof cash flows;
evaluate thecompanys liquidity-indirect method.19Analysis,
communication, judgment13.8 A,BPreparing a worksheet and statement
of cash flows; evaluate the companys financial positionindirect
method.19Analysis, communication, judgmentCritical Thinking
Cases13.1Using a statement of cash flows1Analytical, communication,
judgment13.2Budgeting at a personal level1, 8Analytical,
communication, judgment13.3Window dressing; effects on profit for
the period and net cash flow1, 4, 8Analytical, communication,
judgment13.4Peak pricing8Analytical, communication,
judgment13.5Real World: CLP Holdings, Hysan Cash Flow
Analysis24Analytical, communication, judgment,
research(Internet)
&C&9 The McGraw-Hill Companies, Inc., 2010&A
Description ProblemsDESCRIPTIONS OF PROBLEMS AND CRITICAL
THINKING CASESBelow are brief descriptions of each problem and
case. These descriptions are accompanied by the estimated time (in
minutes) required for completion and by a difficulty rating. The
time estimates assume use of the partially filled-in working
papers.Problems (Sets A and B)13.1 A,BWong Company/Best Company30
MediumPrepare a statement of cash flows. Emphasis is on format of
the statement, with computations held to a minimum. However,
sufficient computations are required to assure that students are
able to distinguish between cash flows and accrual basis
measurements. Uses the direct method.13.2 A,BNew World
Co./Admiralty Fashions25 EasyPrepare the investing activities
section of a statement of cash flows by analyzing changes in
statement of financial position accounts and gains and losses
reported in the income statement.13.3 A,BHayes Export Co./RPZ
Imports25 EasyPrepare the investing activities section of a
statement of cash flows. Problem demonstrates how this section of
the financial statement can be prepared by analyzing income
statement amounts and changes in statement of financial position
accounts.13.4 A,BGalaxy Co./Royce Interiors Co.30 MediumPrepare the
operating activities section of a statement of cash flows from
accounting records maintained using the accrual basis of
accounting. Students also are to explain how more efficient asset
management could increase cash flow provided by operating
activities. Uses the direct method. (Problem *135 uses the same
data but requires use of the indirect method.)13.5 A,BGalaxy Co.
(Indirect)/Royce Interiors Co. (Indirect)25 MediumUsing the data
provided in Problem 13.4 A,B, prepare the operating activities
section of a statement of cash flows using the indirect method.13.6
A,B21st Century Technologies/Golden Technologies45 StrongA
comprehensive problem covering conversion from the accrual basis to
the cash basis and preparation of a statement of cash flows. Uses
the direct method.*
&C&9 The McGraw-Hill Companies, Inc., 2010&A
Description Problems (p.2)Problems (cont'd)13.7 A,BSatellite
2011/CONNECT60 Strong (P13.7A)A comprehensive problem covering all
learning objectives. P13.7A includes a worksheet, the indirect
method, and analysis of the companys financial position. P13.7B
does not include a worksheet and uses the indirect method. We
assign this to groups and let them deal with the worksheet
mechanics on their own.40 Strong (P13.7B)13.8 A,BMiracle Tool
Co./Extra-Ordinaire Co.60 StrongA comprehensive problem covering
all learning objectives. Includes a worksheet, the indirect method,
and analysis of the companys financial position. We assign this to
groups and let them deal with the worksheet mechanics on their
own.*
&C&9 The McGraw-Hill Companies, Inc., 2010&A
Desc. of CasesCritical Thinking Cases13.1Another Look at Allison
Company25 StrongStudents are asked to review the cash flow
statement of Allison Company (the company used as an example
throughout the chapter) and to evaluate the company's ability to
maintain its present level of dividends.13.2Cash Budgeting for You
as a Student15 EasyA simple case that illustrates the usefulness of
cash budgeting in the environment of a college student.13.3Lookin'
Good?45 MediumAn automobile manufacturer is in serious financial
difficulty, and management is considering several proposals to
increase reported profit for the period and net cash flow. Students
are asked to evaluate the probable effects of each proposal. This
case can lead into an open-ended discussion of window dressing in
annual statements.13.4Peak Pricing15 EasyStudents are to discuss
various aspects of peak pricing and discuss how it might be applied
in specific situations. Also, they are to describe situations in
which peak pricing might be considered unethical.13.5Comparing Cash
Flow Information from Two Companies30 MediumInternetVisit a website
that actually provides assistance in preparing cash budgets and
statements of cash flows.
&C&9 The McGraw-Hill Companies, Inc., 2010&A
Q1-5SUGGESTED ANSWERS TO DISCUSSION QUESTIONS1.The primary
purpose of a statement of cash flows is to provide information
about the cash receipts and cash payments of a business. A related
purpose is to provide information about the investing and financing
activities of the business.2.The income statement provides the
better measurement of profitability, especially when the
businessbusiness is financially sound and short-run survival is not
the critical issue. The statement of cash flows is designed for
measuring solvency, not profitability. An income statement, on the
other hand, is specifically designed to measure profitability but
gives little indication of solvency.3.Examples of cash receipts and
of cash payments in the three major classifications of a cash flow
statement are shown below (two receipts and two payments
required):a.Operating activities:Receipts:(1)Cash receipts from
customers.(2)Dividends and interest received.Payments:(1)Cash paid
to suppliers and employees.(2)Interest paid.(3)Income taxes
paid.b.Investing activities:c.Financing
activities:Receipts:Receipts:(1)Sales of investments.(1)Short-term
or long-term borrowing.(2)Collecting loans.(2)Issuance of share
capital.(3)Sales of property, plant and
equipment.Payments:Payments:(1)Purchases of
investments.(1)Repayment of debt.(2)Lending cash.(2) (3)Retirement
of outstanding shares. Payment of dividends.(3)Purchases of
property, plant and equipment.4.Net cash from operating activities
generally reflects the cash effects of transactions entering into
the determination of profit. Because FASB considers that interest
revenue and interest expense enter into the determination of profit
for the period , these items are classified as operating activities
in the United States.5.In the long run, it is most important for a
business to have positive cash flows from operating activities. To
a large extent, the ability of a business to generate positive cash
flows from financing activities is dependent upon its ability to
generate cash from operations. Investors are reluctant to invest
money in a business that does not have an operating cash flow
sufficient to assure interest and dividend payments.Also, a
business cannot sustain a positive cash flow from investing
activities over the long run. A company can only sell productive
assets for a limited period of time. In fact, a successful and
growing company will often show a negative cash flow from investing
activities, as the company is increasing its investment in
property, plant and equipment.7
&C&9 The McGraw-Hill Companies, Inc., 2010&A
Q6-106.Among the classifications shown in the cash flow
statement, a successful and growing company is least likely to
report a positive cash flow from investing activities. A growing
company is usually increasing its investment in property, plant and
equipment, which generally leads to a negative cash flow from
investing activities. If the company is successful and growing,
however, the cash flows from operating activities and from
financing activities usually are positive.7.Profit for the period
may differ from the net cash from operating activities as a result
of such factors as:(1)Depreciation and other noncash expenses that
enter into the determination of period for the period
.(2)Short-term timing differences between the cash basis and
accrual basis of accounting. These include changes in the amounts
of accounts receivable, inventories, prepaid expenses, accounts
payable, and accrued liabilities.(3)Nonoperating gains and losses
that, although included in the measurement of profit for the period
, are attributable to investing or financing activities rather than
to operating activities.8.The direct method identifies the major
operating sources and uses of cash, using such captions as Cash
receipts from customers. The indirect method, on the other hand,
reconciles profit for the period to the net cash from operating
activities by showing a series of adjustments to the profit for the
period figure.Both methods result in exactly the same net cash from
operating activities.9.One purpose of a statement of cash flows is
to provide information about all the investing and financing
activities of a business. Although the acquisition of land by
issuing share capital does not involve a receipt or payment of
cash, the transaction involves both investing and financing
activities. Therefore, these activities are disclosed in a
supplementary schedule that accompanies the statement of cash
flows.10.The credit to the Land account indicates a sale of land
and, therefore, a cash receipt. However, the $220,000 credit
represents only the cost (book value) of the land that was sold.
This amount must be adjusted by any gain or loss recognized on the
sale in order to reflect the amount of cash received.11
&C&9 The McGraw-Hill Companies, Inc., 2010&A
Q11-1511.Credits to share capital accounts usually indicate the
issuance of additional shares. Assuming that these shares were
issued for cash, the transaction would be presented in the
financing activities section of a statement of cash flows as
follows:Proceeds from issuance of shares ($12,000,000 +
$43,500,000) $55,500,00012.The amount of cash dividends paid during
the current year may be determined as follows:Dividends declared
during the year .$4,300,000Add: Decrease during the year in the
liability for dividends payable($1,500,000 - $900,000)
.$600,000Dividends paid during the year $4,900,00013.Free cash flow
is that portion of the net cash from operating activities that is
available for discretionary purposes after the basic obligations of
the business have been met.From a short-term creditors point of
view, free cash flow is a buffer, indicating that the business
brings in more cash than it must have to meet recurring
commitments. Long-term creditors view free cash flow as evidence of
the companys ability to meet interest payments and to accumulate
funds for the eventual retirement of long-term debt.From the
shareholders viewpoint, free cash flow indicates a likelihood of
future dividend increases or, perhaps, expansion of the business,
which will increase future profitability.Management views free cash
flow positively because it is available for discretionary purposes
rather than already committed to basic operations.In summary,
everyone associated with the business views free cash flow
favorablyand the more, the better.14.Peak pricing means charging
higher prices in periods in which customer demand exceeds the
companys capacity, and lower prices in off-peak periods. This
serves the dual purposes of increasing revenue during peak periods,
and allowing the business to serve more customers by shifting
excess demand to off-peak periods.Common examples include
restaurants, which charge higher prices at dinner time, and movie
theaters, which offer low matinee prices during the
daytime.15.Speeding up the collection of accounts receivable does
not increase the total amount collected. Rather, it merely shifts
collections to an earlier time period. The only period(s) in which
cash receipts actually increase are those in which collections
under both the older and newer credit periods overlap.
&C&9 The McGraw-Hill Companies, Inc., 2010&A
BE13.1,2,3,4,5SOLUTIONS TO BRIEF EXERCISESB.Ex. 13.1Cash flows
from operating activities:(in thousands)Cash receipts from
customers$240,000Cash received for interest and dividends50,000Cash
paid to suppliers and employees(127,000)Net cash from operating
activities$163,000B.Ex. 13.2Profit$4,300,000Adjustments to
reconcile profit for the period to net cash from
operations:Depreciation expense$670,000Increase in accounts
receivable(350,000)Increase in accounts payable560,000880,000Net
cash from operating activities$5,180,000B.Ex. 13.3Cash flows from
operating activities:Cash receipts from customers$7,500,000Cash
paid to purchase inventory(3,350,000)Cash paid to
employees(2,300,000)Net cash from operating
activities$1,850,000B.Ex. 13.4Profit for the
period$6,660,000Adjustments to reconcile profit for the period to
net cash from operations:Increase in accounts
receivable($500,000)Decrease in inventory230,000Decrease in
accounts payable(550,000)Increase in accrued expenses
payable140,000(680,000)Net cash from operating
activities$5,980,000B.Ex. 13.5Cash used for investing
activities:Cash paid for investments$(450,000)Cash paid for PPE
assets(1,270,000)Proceeds from sales of PPE assets660,000Net cash
used in investing activities($1,060,000)
&C&9 The McGraw-Hill Companies, Inc., 2010&A
BE13.6,7,8,9,10B.Ex. 13.6Cash flows from financing
activities:Proceeds from issuing ordinary shares$5,600,000Proceeds
from issuing preference shares360,000Cash paid to purchase treasury
shares(350,000)Cash paid for dividends(240,000)Net cash from
financing activities$5,370,000B.Ex. 13.7Cash payments for
purchases:Cost of goods sold$1,001,000Add: Increase in
inventory($430,000 $350,000)80,000Deduct: Increase in accounts
payable($300,000 $230,000)(70,000)Net cash payments for
purchases$1,011,000B.Ex. 13.8Cash balance at the beginning of the
year:Ending balance$1,550,000Add: Cash used in investing
activities670,000Deduct: Cash from operating
activities(1,450,000)Cash from financing
activities(100,000)$670,000B.Ex. 13.9Profit for the
period$560,000Adjustments to reconcile profit for the period to net
cash from operations:Depreciation expense$120,000Increase in
accounts receivable(40,000)Decrease in inventory60,000Increase in
accounts payable30,000Decrease in accrued expenses
payable(20,000)Net cash from operating activities$710,000B.Ex.
13.10Watson, Co.Statement of Cash FlowsFor year ended
_____________Cash flows from operating activities$1,360,000Cash
flows used in investing activities(560,000)Cash flows used in
financing activities(340,000)Change in cash$460,000Cash, beginning
of year8,900,000Cash, end of year$9,360,000
&C&9 The McGraw-Hill Companies, Inc., 2010&A
E13.1,2SOLUTIONS TO EXERCISESEx. 13.1a.The operating activities
section generally includes the cash frrom and used for those
transactions that are included in the determination of profit for
the period. The investing activities section includes cash from and
used for the purchase and disposal of assets that are not held for
resale, primarily investments, and PPE and intangible assets.
Financing activities generally include cash from and used for debt
and equity financing transactions.b.Wallace Company's cash
increased significantly during the year, going from $75,000 to
$243,000. Operations were strong, providing $200,000 of positive
cash flow. Based on the limited information provided, interpreting
the use of $120,000 for investing activities is difficult, but one
possible positive interpretation is that the company is preparing
for the future by acquiring additional PPE and other assets that
will be required. The increase in cash of $88,000 from financing
activities indicates that the company is expanding its financing in
some ways, probably some combination of selling bonds or other debt
securities and selling ordinary, preference, or treasury shares.
While the limited information presented makes substantive
interpretation of the overall cash picture highly speculative, it
is clear that the company has a much larger cash balance at the end
than at the beginning of the year and that the increase is tied
directly to its success in generating cash from its ongoing, normal
operations.Ex. 13.2Note: All dollar figures in the following
calculations are in thousands.a.Cash from operations
$280Expenditures for property, plant and equipment ..(30)Dividends
paid (140)Free cash flow .$110b.The major sources and uses of cash
from financing activities during 2013 were:Source: noneUse:
Dividend paid $140Use: Retirement of Debt $150Financing activities
resulted in a decline in cash of $290 in 2013.c.Cash and cash
equivalents decreased by $5,000 during 2013, moving the cash
balance from $50,000 to $45,000. The company paid dividends of
$140,000 in 2013, and appears to be in a relatively strong cash
position should it decide to pay dividends in the future.d.(1)The
gain on the sale of equity securities represents a reclassification
of this item from the operating activities section of the statement
of cash flows to the investing activities section of the statement
of cash flows. If a gain is present, as in 2013, it is deducted to
effectively remove the item from profit for the period; if a loss
has been present, it would have been added to effectively remove it
from profit for the period.
&C&9 The McGraw-Hill Companies, Inc., 2010&A
E13.2,3,4,5,6(2)The increase in accounts receivable represents
credit sales which were not collected in 2013. In the indirect
method calculation, this item is a decrease in the amount of cash
from profit for the period because the sale was recognized in
determining profit, but the cash was not received in 2013.Ex.
13.3a.Purchases of equity securities ..$1,250,000b.Proceeds from
sales of equity securities ($1,400,000 bookvalue less $350,000
loss) $1,050,000Ex. 13.4a.(1)Net sales:Cash sales $2,850,000Credit
sales 4,600,000Net sales reported as revenue in the income
statement$7,450,000(2)Cash received from collecting accounts
receivable:Credit sales $4,600,000Add: Decrease in accounts
receivable .320,000Collections of accounts receivable
$4,920,000(3)Cash receipts from customers:Net sales (includes cash
sales and credit sales) .$7,450,000Add: Decrease in accounts
receivable 320,000Cash receipts from customers .$7,770,000b.Cash
receipts from customers has two elements: (1) cash sales and (2)
collections of accounts receivable. For cash sales, the amounts of
sales and cash receipts are the same. However, collections on
accounts receivable differ from the amount of credit sales. If
accounts receivable increased, credit sales for the period exceeded
cash collections on these accounts. If, however, accounts
receivable decreased, cash collections of accounts receivable
exceeded credit sales. Thus, cash received from customers may be
greater or less than the amount of net sales.Ex. 13.5Cash payments
to suppliers of goods:Cost of goods sold ..$ 29,750,000Add:Increase
in inventory ($8,200,000 - $7,800,000) ..$400,000Decrease in
accounts payable ($5,000,000 - $4,300,000)700,0001,100,000Cash
payments to suppliers of goods .$ 30,850,000Ex. 13.6The new loans
made ($150 million) will appear among the investing activities of
the company as a cash outflow. The $360 million collected from
borrowers will be split into two cash flows. The $300 million in
interest revenue will be included among the cash inflows from
operating or investing activities, whereas the $60 million in
principal amounts collected from borrowers ($360 million - $300
million) will appear as a cash inflow from investing
activities.
&C&9 The McGraw-Hill Companies, Inc., 2010&A
E13.7,8Ex. 13.7DISCOVERY BAY OUTFITTERS, Co.Statement of Cash
FlowsFor the Year Ended 31 December, 2013Cash flows from operating
activities:Cash receipts from customers $7,950,000Interest and
dividends received .$270,000Cash from operating activities
..$8,220,000Cash paid to suppliers and employees
..$(6,350,000)Interest paid .$(190,000)Income taxes paid
..$(710,000)Cash disbursed for operating activities
.$(7,250,000)Net cash from operating activities$970,000Cash flows
from investing activities:Loans made to borrowers
$(50,000)Collections on loans .$40,000Cash paid to acquire
property, plant and equipment ..$(210,000)Proceeds from sales of
property, plant and equipment$90,000Net cash used for investing
activities $(130,000)Cash flows from financing activities:Proceeds
from short-term borrowing .$100,000Dividends paid ..$(550,000)Net
cash used for financing activities ..$(450,000)Net increase in cash
and cash equivalents .$390,000Cash and cash equivalents, 1 January
.$358,000Cash and cash equivalents, 31 December $748,000Ex.
13.8a.(1)Expenditures for R&D are an operating activity. In the
short term, reducing these expenditures will increase the net cash
from operating activities.(2)In the long run, reducing expenditures
for R&D may reduce cash flows from operations by reducing the
number of new products the company brings to market.b.Selling to
customers using bank credit cards taps a new market of potential
customers. This should increase sales and cash receipts in both the
short and long term.c.(1)Reducing inventory will lessen
expenditures for inventory purchases during the time that inventory
levels decline. This will improve the net cash from operating
activities in the near term.(2)Once inventory has stabilized at the
new and lower level, monthly expenditures will become approximately
equal to the inventory used. Thus, this strategy will not affect
cash flows once inventory has stabilized.d.(1)Deferring taxes can
postpone taxes each year. For a growing business, this can reduce
annual cash outlays year after year. Thus, it can increase net cash
flows over both the short and long terms.(2)At some point in the
future, the early deferrals will require payment, causing the cash
paid to stabilize, much like c. (2) above.e.Dividends are a
financing activity, not an operating activity. Therefore,
discontinuing dividends has no direct effect upon the net cash from
operating activities. Over the long term, however, the business may
increase its cash flows by investing the cash that it retains.
&C&9 The McGraw-Hill Companies, Inc., 2010&A
E13.10Ex. 13.10HOPE MACHINERY CO.Partial Statement of Cash
FlowsFor the Year Ended 31 December 2013Cash flows from operating
activities:Profit for the period.$385,000Add:Depreciation expense
..$125,000Amortization of intangible assets 40,000Nonoperating loss
on sale of investments 35,000Decrease in accounts receivable
45,000Decrease in inventory 72,000Increase in accrued expenses
payable ..25,000$342,000Subtotal ..$727,000Less:Nonoperating gain
on sale of property, plant and equipment$90,000Increase in prepaid
expenses .$12,000Decrease in accounts payable ..31,000$133,000Net
cash from operating activities .$594,000
&C&9 The McGraw-Hill Companies, Inc., 2010&A
E13.11Ex. 13.11a.Operating activityb.Financing
activityc.Operating or Financing activityd.Financing
activitye.Operating activityf.Operating activityg.Not included in
the statement of cash flows. A money market fund is viewed as a
cash equivalent. Therefore, transfers between bank accounts and
money market funds are not viewed as cash receipts or cash
payments.h.Investing activityi.Not included in a statement of cash
flows prepared by the direct method. Depreciation is a noncash
expense; recording depreciation does not require any cash outlay
within the accounting period.j.Operating activityk.Financing
activityl.Operating or Financing activitym.Operating or Investing
activityn.Investing activityo.Not included in the statement of cash
flows. Transfers between cash equivalents and other forms of cash
are not regarded as cash receipts or cash payments.
&C&9 The McGraw-Hill Companies, Inc., 2010&A
E13.12Ex. 13.121.Operating activity2.Financing
activity3.Operating or Financing activity4.Financing
activity5.Operating activity6.Operating activity7.Not included in
the statement of cash flows. A money market fund is viewed as a
cash equivalent. Therefore, transfers between bank accounts and
money market funds are not viewed as cash receipts or cash
payments.8.Investing activity9.Not included in a statement of cash
flows prepared by the direct method. Amortization is a noncash
expense; recording amortization does not require any cash outlay
within the accounting period.10.Operating activity11.Financing
activity12.Operating or Financing activity13.Operating or Investing
activity14.Investing activity15.Not included in the statement of
cash flows. Transfers between cash equivalents and other forms of
cash are not regarded as cash receipts or cash payments.
&C&9 The McGraw-Hill Companies, Inc., 2010&A
E13.13Ex. 13.13a.Cash from investing activities:Sale of
equipment$1,560,000Sale of land1,600,000Purchase of
equipment(1,780,000)$1,380,000b.The amount of gain or loss is
reflected in the cash receipts figure. For example, equipment that
was sold for $1,560,000 at a $34,000 loss had a book value (cost,
less accumulated depreciation) at the time of sale of
$1,594,000:Cost, less accumulated depreciation$1,594,000Cash
received from sale(1,560,000)Loss on sale$34,000Similarly, land
that was sold for $1,600,000 and which resulted in a $50,000 gain
had a cost of $1,550,000:Cash received from
sale$1,600,000Cost(1,550,000)Gain on sale$50,000Using the amount of
cash received in the calculation of cash from investing activities
automatically incorporates the gain or loss on the sale.c.The
following items were excluded because they are financing
activities, not investing activities:Cash receipts from sale of
ordinary sharesCash payments to purchase treasury shares, retire
debt, and pay dividends on preference and ordinary shares
&C&9 The McGraw-Hill Companies, Inc., 2010&A
E13.9Ex. 13.9a.Added to profit for the period. In a statement of
cash flows, the insurance proceeds from a fire are classified as an
investing activity, not an operating activity. However, this
extraordinary loss reduced the amount of profit for the period
reported in the income statement. Therefore, this nonoperating loss
is added back to profit for the period as a step in determining the
net cash from operating activities.b.Added to profit for the
period. Depreciation is a noncash expense. Although it reduces the
profit for the period for the period, no cash outlay is required.
Thus, to the extent of noncash expenses recorded during the period,
profit for the period is less than the amount of net cash
flow.c.Omitted from the computation. The transfer of cash from a
bank account to a money market fund has no effect on profit for the
period. Also, as a money market fund is a cash equivalent, this
transfer is not regarded as a cash transaction.d.Deducted from
profit for the period. An increase over the year in the amount of
accounts receivable indicates that revenue recognized in the income
statement (credit sales) exceeds the collections of cash from
credit customers. Therefore, profit for the period is reduced by
the increase in receivables which has not yet been
collected.e.Omitted from the computation. Cash receipts from
customers is a cash inflow shown in the direct method of computing
net cash from operating activities. However, this cash inflow does
not appear separately when the indirect method is used.f.Added to
profit for the period for the period. A reduction in prepaid
expenses indicates that the amounts expiring (and, therefore, being
recognized as expense) exceed cash outlays for these items during
the period. Thus, profit for the period for the period measured on
the accrual basis is lower than net cash flow.g.Omitted from the
computation. Declarations and payments of dividends do not enter
into the determination of either profit for the period or net cash
from operating activities. Therefore, these transactions do not
cause a difference between these figures. Dividends paid are
reported in the financing activities section as a
disbursement.h.Added to profit for the period. An increase in
accounts payable means that purchases of goods or expenses,
measured on the accrual basis, exceed the payments during the
period made to suppliers and other creditors. Thus, costs and
expenses measured on the accrual basis were greater than the actual
cash payments during the period.i.Deducted from profit for the
period. The $2 million reduction in accrued income taxes payable
means that cash payments to tax authorities exceeded by $2 million
the income tax expense of the current year. Therefore, cash outlays
exceeded the expenses shown in the income statement, and net cash
from operating activities is smaller than profit for the
period.
&C&9 The McGraw-Hill Companies, Inc., 2010&A
E13.14Ex. 13.14a.CashIf interest expense is not classified as a
finacing cash flowSale of bonds$400,000Sale of treasury
shares34,000Dividends on ordinary shares(60,000)Purchase of
treasury shares(20,000)Net cash from financing activities$354,000If
interest expense is classified as a finacing cash flowSale of
bonds$400,000Interest expense78,000Sale of treasury
shares34,000Dividends on ordinary shares(60,000)Purchase of
treasury shares(20,000)Net cash from financing
activities$432,000b.The following items were excluded from the
above calculations because they are classified as indicated below
in the statement of cash flows:Classified as operating
activities:Cash receipts from customersCash received from interest
and dividends receivedCash paid to employeesCash paid to purchase
inventoryCash paid for interest expense (if not classified as a
finacing cash flow)Classified as investing activities:Cash received
from sale of equipmentc.Interest expense could be classified as a
financing or operating activity in the statement of cash flows in
accordance with IFRSs. Interest expense is classified as a
financing cash flow on the ground that it is a cost of obtaining
financial resources. On the other hand, FASB in the United States
classifies interest expense as an operating cash flow on the ground
that interest expense is an ordinary cost of doing business and is
included in the determination of profit.
&C&9 The McGraw-Hill Companies, Inc., 2010&A
E13.15Ex. 13.15a.Income before taxes for 2012 were 851 million,
compared with 942 million net cash from operating activities. The
primary cause of the difference is increase in receivable and other
assets, which accounts for 135 million of the difference. The
majority of the remaining difference is attributed to increase in
accounts payable and other current liabilities.b.The major uses of
cash, other than operations, are as follows:Investing activities:
purchases of property, plant and equipment (376 millionin in 2012
and 318 million in 2011) .Financing activities:For 2011: mainly,
167 million and 273 million were used to pay dividend and repay
short-term borrowings respectively.For 2012: mainly, 496 million
were proceeds from issue of a convertible bond togather with 209
million and 231 million were used to pay dividend and repay
short-term borrowings respectively.c.Negative cash from investing
and financing activities do not necessarily lead to a negative
interpretation of a company's cash position. In adidas AG's case in
2011 and 2012, significant amounts of operating cash flows have
been invested in heavy capital expenditures (which represent growth
and future strength), as well as used to pay dividend and reduce
short-term borrowings . In fact, the company's cash position
appears to be strong as discussed below in part d.d.Free cash flow
for the two years is determined as follows ( in millions)
:20122011Net cash from operating activities942807Net cash used for
acquiringproperty, plant, and equipment(376)(318)Cash paid for
dividends(209)(167)357322While the general trend is mixed, the
three primary elements in the free cash flow calculation are
significant increase in cash from operations, strong investment in
PPE assets in 2011 and 2012, and stable dividends paid to
shareholders. In general, adidas AG, Herzogenaurach appears to be
in a strong cash position.
&C&9 The McGraw-Hill Companies, Inc., 2010&A
P13.1ASOLUTIONS TO PROBLEM SET A30 Minutes, MediumPROBLEM
13.1AWONG COMPANYa.WONG COMPANYStatement of Cash FlowsFor the Year
Ended 31 December 2013Cash flows from operating activities:Cash
receipts from customers (1)$3,000,000Interest and dividends
received$100,000Cash from operating activities$3,100,000Cash paid
to suppliers and employees (2)$(2,550,000)Interest
paid$(180,000)Income taxes paid$(95,000)Cash disbursed for
operating activities$(2,825,000)Net cash from operating
activities$275,000Cash flows from investing activities:Loans made
to borrowers$(500,000)Collections on loans$260,000Cash paid to
acquire property, plant and equipment$(3,100,000)Proceeds from
sales of property, plant and equipment (3)$580,000Net cash used in
investing activities:$(2,760,000)Cash flows from financing
activities:Proceeds from issuing bonds payable$2,500,000Dividends
paid$(120,000)Net cash from financing activities$2,380,000Net
increase (decrease) in cash and cash equivalents$(105,000)Cash and
cash equivalents, beginning of year$489,000Cash and cash
equivalents, end of year$384,000Supporting computations:(1)Cash
receipts from customers:Cash sales$800,000Collections on accounts
receivable$2,200,000Cash receipts from customers$3,000,000(2)Cash
paid to suppliers and employees:Payments on accounts payable to
merchandise supplierssuppliers of goods$1,500,000Cash payments for
operating expenses$1,050,000Cash paid to suppliers and
employees$2,550,000(3)Proceeds from sales of property, plant and
equipment:Book value of property, plant and equipment
sold$660,000Less: Loss on sales of property, plant and
equipment$80,000Proceeds from sales of property, plant and
equipment$580,000Note to instructor:The transfer from the money
market fund to the general bank account is not considered a cash
receipt because a money market fund is a cash
equivalent.Alternatively, interest and dividends received, and
interest paid could be classified as investing cash flows and
financing cash flows, respectively.
&C&9 The McGraw-Hill Companies, Inc., 2010&A
P13.2A25 Minutes, EasyPROBLEM 13.2ANEW WORLD CO.a.NEW WORLD
CO.Partial Statement of Cash FlowsFor the Year Ended 31 December
2013Cash flows from investing activities:Purchases of equity
securities$(750,000)Proceeds from sales of equity securities
(1)$1,320,000Loans made to borrowers$(2,100,000)Collections on
loans$1,620,000Cash paid to acquire property, plant and equipment
(see part b)$(600,000)Proceeds from sales of property, plant and
equipment (2)$120,000Net cash used for investing
activities$(390,000)Supporting computations:(1)Proceeds from sales
of equity securities:Cost of securities sold (credit entries
toEquity Securities account)$900,000Add: Gain on sales of equity
securities$420,000Proceeds from sales of equity
securities$1,320,000(2)Proceeds from sales of property, plant and
equipment:Cost of property, plant and equipment sold or
retired$1,200,000Less: Accumulated depreciation on property,plant
and equipment sold or retired$750,000Book value of property, plant
and equipment sold or retired$450,000Less: Loss on sales of
property, plant and equipment$330,000Proceeds from sales of
property, plant and equipment$120,000b.Schedule of noncash
investing and financing activities:Purchases of property, plant and
equipment$1,960,000Less: Portion financed through issuance of
long-term note payable$1,360,000Cash paid to acquire property,
plant and equipment$600,000c.Cash must be generated to cover the
companys investment needs through operating or financing
activities. Ideally, cash to support investing activities should
come from normal operations. If this places undue strain on the
companys operations, however, financing via borrowing and/or sale
of shares are alternatives the company should consider.
&C&9 The McGraw-Hill Companies, Inc., 2010&A
P13.3A25 Minutes, EasyPROBLEM 13.3AHAYES EXPORT CO.a.HAYES
EXPORT CO.Partial Statement of Cash FlowsFor the Year Ended 31
December 2013Cash flows from investing activities:Purchases of
equity securities$(780,000)Proceeds from sales of equity securities
(1)460,000Loans made to borrowers(550,000)Collections on
loans600,000Cash paid to acquire property, plant and equipment (see
part b)(500,000)Proceeds from sales of property, plant and
equipment (2)520,000Net cash used in investing
activities$(250,000)Supporting computations:(1)Proceeds from sales
of equity securities:Cost of securities sold (credit entries
toEquity Securities account)$620,000Less: Loss on sales of equity
securities160,000Proceeds from sales of equity
securities$460,000(2)Proceeds from sales of property, plant and
equipment:Cost of property, plant and equipment sold or
retired$1,400,000Less: Accumulated depreciation on property, plant
andequipment sold or retired1,000,000Book value of property, plant
and equipment sold or retired$400,000Add: Gain on sales of
property, plant and equipment120,000Proceeds from sales of
property, plant and equipment$520,000b.Schedule of noncash
investing and financing activities:Purchases of property, plant and
equipment$1,500,000Less: Portion financed through issuance of
long-term debt1,000,000Cash paid to acquire property, plant and
equipment$500,000c.Management has more control over the timing and
amount of outlays for investing activities than for operating
activities. Many of the outlays for operating activities are
contractual, reflecting payroll agreements, purchase invoices,
taxes, and monthly bills. Most investing activities, in contrast,
are discretionaryboth as to timing and dollar amount.
&C&9 The McGraw-Hill Companies, Inc., 2010&A
P13.4A30 Minutes, MediumPROBLEM 13.4AGALAXY CO.a.GALAXY
CO.Partial Statement of Cash FlowsFor the Year Ended 31 December
2013Cash flows from operating activities:Cash receipts from
customers (1)$2,920,000Interest and dividends received
(2)$171,000Cash from operating activities$3,091,000Cash paid to
suppliers and employees (3)$(2,476,000)Interest paid
(4)$(176,000)Income taxes paid (5)$(103,000)Cash disbursed for
operating activities$(2,755,000)Net cash from operating
activities$336,000(1)Cash receipts from customers:Net
sales$2,850,000Add: Decrease in accounts receivable$70,000Cash
receipts from customers$2,920,000(2)Interest and dividends
received:Dividend income (cash basis)$104,000Interest
income$70,000Subtotal$174,000Less: Increase in accrued interest
receivable$3,000Interest and dividends received$171,000(3)Cash paid
to suppliers and employees:Cash paid to suppliers of goods:Cost of
goods sold$1,550,000Add: Increase in inventories$35,000Net
purchases$1,585,000Less: Increase in accounts payable to
suppliers$8,000Cash paid to suppliers of goods$1,577,000Cash paid
for operating expenses:Operating expenses$980,000Less: Depreciation
expense$115,000Subtotal$865,000Add: Increase in short-term
prepayments$5,000Add: Decrease in accrued operating expenses
payable$29,000$899,000Cash paid to suppliers and
employees$2,476,000(4)Interest paid:Interest expense$185,000Less:
Increase in accrued interest payable$9,000Interest
paid$176,000(5)Income taxes paid:Income tax expense$90,000Add:
Decrease in accrued income taxes payable$13,000Income taxes
paid$103,000Note to instructors: Alternatively, interest and
dividends received, and interest paid could be classified as
investing cash flows and financing cash flows, respectively.
&C&9 The McGraw-Hill Companies, Inc., 2010&A
P13.4A (p.2)PROBLEM 13.4AGALAXY CO. (concluded)b.In addition to
more aggressive collection of accounts receivable, management could
increase cash flows from operations by (only two required):
Reducing the amount of inventories being held. Reducing the amount
of short-term prepayments of expenses. Taking greater advantage of
accounts payable as a short-term means of financing purchases of
goods and services.
&C&9 The McGraw-Hill Companies, Inc., 2010&A
P13.5A25 Minutes, MediumPROBLEM 13.5AGALAXY CO. (INDIRECT)Galaxy
Co.Partial Statement of Cash FlowsFor the Year Ended 31 December
2013Cash flows from operating
activities:Profit$223,000Add:Depreciation expense$115,000Decrease
in accounts receivable$70,000Increase in accounts payable to
suppliers$8,000Increase in accrued interest
payable$9,000$202,000Subtotal$425,000Less:Increase in accrued
interest receivable$3,000Increase in inventories$35,000Increase in
short-term prepayments$5,000Decrease in accrued operating expenses
payable$29,000Decrease in accrued income taxes payable$13,000Gain
on sales of equity securities$4,000$89,000Net cash from operating
activities$336,000Credit sales cause receivables to increase, while
collections cause them to decline. If receivables decline over the
year, collections during the year must have exceeded credit sales
for the year. Thus, cash receipts exceed revenue measured on the
accrual basis.
&C&9 The McGraw-Hill Companies, Inc., 2010&A
P13.6A45 Minutes, StrongPROBLEM 13.6A21st CENTURY
TECHNOLOGIESa.21st CENTURY TECHNOLOGIESStatement of Cash FlowsFor
the Year Ended 31 December 2013Cash flows from operating
activities:Cash receipts from customers (1)$3,140,000Interest
received (2)$42,000Cash from operating activities$3,182,000Cash
paid to suppliers and employees (3)$(2,680,000)Interest paid
(4)$(38,000)Income taxes paid (5)$(114,000)Cash disbursed for
operating activities$(2,832,000)Net cash from operating
activities$350,000Cash flows from investing activities:Purchases of
equity securities$(60,000)Proceeds from sales of equity securities
(6)$72,000Loans made to borrowers$(44,000)Collections on
loans$28,000Cash paid to acquire property, plant and
equipment$(500,000)Proceeds from sales of property, plant and
equipment (7)$24,000Net cash used in investing
activities:$(480,000)Cash flows from financing activities:Proceeds
from short-term borrowing$82,000Payments to settle short-term
debts$(92,000)Proceeds from issuing ordinary shares
(8)$180,000Dividends paid$(120,000)Net cash used in financing
activities$50,000Net increase (decrease) in cash and cash
equivalents$(80,000)Cash and cash equivalents, beginning of
year$244,000Cash and cash equivalents, end of
year$164,000Supporting computations:(1)Cash receipts from
customers:Net sales$3,200,000Less: increase in accounts
receivable$60,000Cash receipts from customers$3,140,000(2)Interest
received:Interest revenue$40,000Add: Decrease in accrued interest
receivable$2,000Interest received$42,000
&C&9 The McGraw-Hill Companies, Inc., 2010&A
P13.6A (p.2)PROBLEM 13.6A21st CENTURY
TECHNOLOGIESa.(continued)(3)Cash paid to suppliers and
employees:Cash paid for purchases of goods:Cost of goods
sold$1,620,000Less: Decrease in inventory$60,000Net
purchases$1,560,000Add: Decrease in accounts payable to
suppliers$16,000Cash paid for purchases of goods$1,576,000Cash paid
for operating expenses:Operating expenses$1,240,000Less:
Depreciation (a noncash expense)$150,000Subtotal$1,090,000Add:
Increase in prepayments$6,000Add: Decrease in accrued liab. for
operating expenses$8,000Cash paid for operating
expenses$1,104,000Cash paid to suppliers and employees($1,576,000 +
$1,104,000)$2,680,000(4)Interest paid:Interest expense$42,000Less:
Increase in accrued interest payable$4,000Interest
paid$38,000(5)Income taxes paid:Income tax expense$100,000Add:
Decrease in income taxes payable$14,000Income taxes
paid$114,000(6)Proceeds from sales of equity securities:Cost of
equity securities sold (credit entriesto the Equity Securities
account)$38,000Add: Gain reported on sales of equity
securities$34,000Proceeds from sales of equity
securities$72,000(7)Proceeds from sales of property, plant and
equipment:Book value of property, plant and equipment sold
(paragraph 8)$36,000Less: Loss reported on sales of property, plant
and equipment$12,000Proceeds from sales of property, plant and
equipment$24,000(8)Proceeds from issuing share capital:Amounts
credited to Share Capital account$20,000Add: Amounts credited to
share premium account$160,000Proceeds from issuing share
capital$180,000Note to instructors: Alternatively, interest and
dividends received, and interest paid could be classified as
investing cash flows and financing cash flows, respectively.
&C&9 The McGraw-Hill Companies, Inc., 2010&A
P13.6A (p.3)PROBLEM 13.6A21st CENTURY TECHNOLOGIES
(concluded)b.(1)The primary reason why cash from operating
activities substantially exceeded profit was the company's $150,000
in depreciation expense. Depreciation reduces profit, but does not
affect the cash flows from operating activities.(2)The primary
reason for the net decrease in cash was the large cash outlays for
investing activitiesspecifically, the cash paid to acquire
property, plant and equipment.c.To the extent that receivables
increase, the company has not yet collected cash from its
customers. Thus, if the growth in receivables had been limited to
$10,000, instead of $60,000, the company would have collected an
additional $50,000 from its customers. Thus, the net decrease in
cash (and cash equivalents) would have been $30,000, instead of
$80,000.
&C&9 The McGraw-Hill Companies, Inc., 2010&A
P13.7A60 Minutes, StrongPROBLEM 13.7ASATELLITE 2011a.SATELLITE
2011Worksheet for a Statement of Cash FlowsFor the Year Ended 31
December 2013Balance sheet effects:Effect of
TransactionsBeginningDebitCreditEndingBalanceChangesChangesBalanceAssetsCash
and cash equivalents$80,000(x)$43,000$37,000Accounts
receivable100,000(3)750,000850,000Property, plant and equipment
(netof accumulated
depreciation)600,000(6)2,200,000(2)147,0002,653,000Totals780,0003,540,000Liabilities
& EquityNotes payable
(short-term)0(7)1,450,0001,450,000Accounts
payable30,000(4)33,00063,000Accrued expenses
payable45,000(5)13,00032,000Notes payable
(long-term)390,000(6)350,000740,000Share
capital200,000(8)500,000700,000Retained
earnings115,000(1)440,000$555,000Totals=SUM(f10.f18)$780,000$2,963,000$2,963,000$3,540,000Cash
effects:SourcesUsesOperating
activities:Profit(1)440,000Depreciation expense(2)147,000Increase
in accounts receivable(3)750,000Increase in accounts
payable(4)33,000Decrease in accruedexpenses
payable(5)$13,000Investing activities:Cash paid for
PPE(6)$1,850,000Financing activities:Short-term
borrowing(7)$1,450,000Issuance of ordinary
shares(8)$500,000Subtotals$2,570,000$2,613,000Net decrease in
cash(x)$43,000Totals$2,613,000$2,613,000
&C&9 The McGraw-Hill Companies, Inc., 2010&A
P13.7A (p.2)PROBLEM 13.7ASATELLITE 2011 (continued)b.SATELLITE
2011Statement of Cash FlowsFor the Year Ended 31 December 2013Cash
flows from operating activities:Profit$440,000Add:Depreciation
expense$147,000Increase in accounts
payable$33,000Subtotal$620,000Less:Increase in accounts
receivable$750,000Decrease in accrued expenses
payable$13,000$763,000Net cash used in operating
activities$(143,000)Cash flows from investing activities:Cash paid
to acquire property, plant and equipment (see
schedule)$1,850,000Net cash used in investing
activities$(1,850,000)Cash flows from financing
activities:Short-term borrowing from bank$1,450,000Issuance of
ordinary shares$500,000Net cash from financing
activities$1,950,000Net increase (decrease) in cash$(43,000)Cash
and cash equivalents, 1 January 2013$80,000Cash and cash
equivalents, 31 December 2013$37,000Supplementary Schedule: Noncash
Investing and Financing ActivitiesPurchase of property, plant and
equipment$2,200,000Less: Portion financed by issuing long-term
notes payable$350,000Cash paid to acquire property, plant and
equipment$1,850,000
&C&9 The McGraw-Hill Companies, Inc., 2010&A
P13.7A(p.3)PROBLEM 13.7ASATELLITE 2010 (concluded)c.Satellite
2010s credit sales resulted in $750,000 in new receivables, which
were uncollected as of year-end. These credit sales all were
included in the computation of profit, but those that remained
uncollected at year-end do not represent cash receipts. Therefore,
the cash flow from operating activities was substantially below the
amount of profit measured on the accrual basis.Note to instructor:
It is not uncommon for cash flows to lag behind a rising profit
figure in a growing business. This is why many rapidly growing
businesses find themselves strapped for cash to finance their
growth.d.Satellite 2010 does not appear headed for insolvency.
First, the company has a $6 million line of credit, against which
it has drawn only $1,450,000. This gives the company considerable
debt-paying ability. Next, if Satellite 2010s rapid growth
continues, the company should not have difficulty issuing
additional shares to investors as a means of raising cash. If a
company is obviously successful, it usually is able to raise the
cash necessary to finance expanding operations.
&C&9 The McGraw-Hill Companies, Inc., 2010&A
P13.8A60 Minutes, StrongPROBLEM 13.8AMIRACLE TOOL
COMPNYa.MIRACLE TOOL COMPANYWorksheet for a Statement of Cash
FlowsFor the Year Ended 31 December 2013Balance sheet
effects:BeginningDebitCreditEndingBalanceChangesChangesBalanceAssetsCash
and cash equivalents$100,000(x)$500,000$600,000Equity
securities$200,000(8)$150,000$50,000Accounts
receivable400,000(4)170,000230,000Inventories1,200,000(5)20,0001,220,000Property,
plant and equipment( net of accumulated
depreciation)3,000,000(9)200,000(3)350,0002,850,000Totals4,900,0004,950,000Liabilities
& EquityAccounts payable500,000(6)230,000730,000Accrued
expenses payable170,000(7)30,000140,000Notes
payable2,450,000(10)100,000(9)180,0002,530,000Share
capital1,200,000(11)150,0001,350,000Retained
earnings580,000(1)340,000200,000(2)40,000Totals$4,900,000$1,230,000$1,230,000$4,950,000Cash
effects:SourcesUsesOperating activities:Net
loss(1)340,000Depreciation expense(3)350,000Decrease in accounts
receivable(4)170,000Increase in inventory(5)20,000Increase in
accounts payable(6)230,000Decrease in accrued(7)30,000expenses
payableLoss on sale of equitysecurities(8)$10,000Investing
activities:Proceeds from sale ofequitye securities(8)$140,000Cash
paid for property, plant & equipment(9)$20,000Financing
activitiesDividends paid(2)$40,000Payment of note
payable(10)$100,000Issuance of
shares(11)$150,000Subtotals$1,050,000$550,000Net increase in
cash(x)$500,000Totals$1,050,000$1,050,000
&C&9 The McGraw-Hill Companies, Inc., 2010&A
P13.8A (p.2)PROBLEM 13.8AMIRACLE COPANY (continued)b.MIRACLE
TOOL COMPANYStatement of Cash FlowsFor the Year Ended 31 December
2013Cash flows from operating activities:Net
loss$(340,000)Add:Depreciation expense$350,000Decrease in accounts
receivable$170,000Increase in accounts payable$230,000Loss on sale
of equity securities$10,000Subtotal$420,000Less:Increase in
inventory$20,000Decrease in accrued expenses$30,000$50,000Net cash
from operating activities$370,000Cash flows from investing
activities:Proceeds from sale of equity securities$140,000Cash paid
to acquire PPE assets (see supplementary schedule)$(20,000)Net cash
used in investing activities$120,000Cash flows from financing
activities:Dividends paid$(40,000)Payment of note
payable$(100,000)Issuance of share$150,000Net cash used in
financing activities$10,000Net increase (decrease) in
cash$500,000Cash and cash equivalents, 1 January 2013$100,000Cash
and cash equivalents 31 Dec. 2013$600,000Supplementary Schedule:
Noncash Investing and Financing ActivitiesPurchase of PPE
assets$200,000Less: Portion financed through issuance of long-term
debt$180,000Cash paid to acquire PPE assets$20,000
&C&9 The McGraw-Hill Companies, Inc., 2010&A
P13.8A(p.3)PROBLEM 13.8AMIRACLE TOOL COMPANY
(continued)c.Miracle Tool Co. achieved its positive cash flow from
operating activities basically byliquidating assets and by not
paying its bills. It has converted most of its accountsreceivable
into cash, which probably means that credit sales have declined
substantially over the past several months. A decrease in sales
shows up in theincome statement immediately, but may take months
before its effects appear in astatement of cash flows.Miracle Tool
Co. is not replacing PPE assets as quickly as these assets are
beingdepreciated. In any given year, this may not be significant.
But on the other hand, thisrelationship certainly indicates that
the business is not expanding, and it may indicatethat the company
is deferring replacements of PPE assets in an effort to
conservecash.Miracle Tool Co. is allowing its accounts payable to
rise much more quickly than it isincreasing inventory. This
indicates that the company is not paying its bills as quicklyas it
used to. While this conserves cash, the savings are temporary.
Also, if thecompanys credit rating is damaged, this strategy may
reduce both earnings and cashflows in the near future.d.Miracle
Tool Co. has substantially more cash than it did a year ago.
Nonetheless, the companys financial position appears to be
deteriorating. Its equity securitiesa highly liquid assetare almost
gone. Its accounts payable are rising rapidly, and substantially
exceed the amount of cash on hand. Most importantly, sales and
accounts receivable both are falling, which impairs the companys
ability to generate cash from operating activities in the future.
Also, the liquidity of the companys inventory is questionable in
light of the declining sales.e.This company is contracting its
operations. Its investment in equity securities, receivables, and
PPE assets all are declining. Further, the income statement shows
that operations are eroding the owners equity in the business. The
decline in salesalready apparent in the income statementsoon will
reduce the cash collected from customers, which is the principal
factor contributing to a positive cash flow from operating
activities.In summary, this company appears to be in real
trouble.f.The companys principal revenue sourcesales of
toolsappears to be collapsing. If nothing is done, it is likely
that the annual net losses will increase, and that operating cash
flows soon will turn negative. Thus, managements first decision is
whether to attempt to revive the company, or liquidate it.If the
company is to be liquidated, this should be done quickly to avoid
future operating losses. Information should be gathered to
determine whether it would be best to sell the company as a going
concern or whether management should sell the assets individually.
In either event, management should stop purchasing tools. Assuming
that sales continue to decline, the companys current inventory
appears to be approximately a one-year supply.
&C&9 The McGraw-Hill Companies, Inc., 2010&A
P13.8A(p.4)PROBLEM 13.8AMIRACLE TOOL COMPANY (concluded)If
management decides to continue business operations, it should take
the following actions:Expand the companys product lines! The
combination tool alone can no longer support profitable operations.
Also, dependency upon a single productespecially a faddish product
with a limited market potentialis not a sound long-term
strategy.Stop buying the combination toolat least until the current
inventory is sold. This will not improve profitability, but will
help cash flows. (As explained above, the companys current
inventory appears about equal to next years potential sales.)Look
for ways to reduce operating expenses. In 2013, sales declined by
30%, but the company was able to reduce operating expenses by only
about 6.5% ($170,000 decline from a level of $2,600,000).Stop
paying dividends. The company has no cash to spare. As sales
continue to fall,the net cash from operating activities is likely
to turn negative. Collectingexisting receivables and letting
payables go unpaid can only bolster net cash flow for alimited
period of time.Develop forecasts of future operations and cash
flows. If a turnaround does not appear realistic, management should
reconsider the option of liquidating the company.
&C&9 The McGraw-Hill Companies, Inc., 2010&A
P13.1BSOLUTIONS TO PROBLEM SET B30 Minutes, MediumPROBLEM
13.1BBEST COMPANYa.BEST COMPANYStatement of Cash FlowsFor the Year
Ended 31December 2013Cash flows from operating activities:Cash
receipts from customers (1)$3,040,000Interest and dividends
received$40,000Cash from operating activities$3,080,000Cash paid to
suppliers and employees (2)$(2,150,000)Interest
paid$(130,000)Income taxes paid$(65,000)Cash disbursed for
operating activities$(2,345,000)Net cash from operating
activities$735,000Cash flows from investing activities:Loans made
to borrowers$(690,000)Collections on loans$300,000Cash paid to
acquire property, plant and equipment$(1,700,000)Proceeds from
sales of property, plant and equipment (3)$490,000Net cash used for
investing activities:$(1,600,000)Cash flows from financing
activities:Proceeds from issuing bonds payable$2,000,000Dividends
paid$(250,000)Net cash from financing activities$1,750,000Net
increase (decrease) in cash and cash equivalents$885,000Cash and
cash equivalents, beginning of year$115,000Cash and cash
equivalents, end of year$1,000,000Supporting computations:(1)Cash
receipts from customers:Cash sales$230,000Collections on accounts
receivable$2,810,000Cash receipts from customers$3,040,000(2)Cash
paid to suppliers and employees:Payments on accounts payable to
merchandise supplierssuppliers of goods$1,220,000Cash payments for
operating expenses$930,000Cash paid to suppliers and
employees$2,150,000(3)Proceeds from sales of property, plant and
equipment:Book value of property, plant and equipment
sold$520,000Less: Loss on sales of property, plant and
equipment$30,000Proceeds from sales of property, plant and
equipment$490,000Note to instructor:The transfer from the money
market fund to the general bank account is not considered a cash
receipt because a money market fund is a cash
equivalent.Alternatively, interest and dividends received, and
interest paid could be classified as investing cash flows and
financing cash flows, respectively.
&C&9 The McGraw-Hill Companies, Inc., 2010&A
P13.2B25 Minutes, EasyPROBLEM 13.2BADMIRALTY FASHIONSa.ADMIRALTY
FASHIONSPartial Statement of Cash FlowsFor the Year Ended 31
December 2013Cash flows from investing activities:Purchases of
equity securities$(650,000)Proceeds from sales of equity securities
(1)$890,000Loans made to borrowers$(1,750,000)Collections on
loans$500,000Cash paid to acquire property, plant and equipment
(see part b)$(700,000)Proceeds from sales of property, plant and
equipment (2)$800,000Net cash used for investing
activities$(910,000)Supporting computations:(1)Proceeds from sales
of equity securities:Cost of securities sold (credit entries
toEquity Securities account)$740,000Add: Gain on sales of equity
securities$150,000Proceeds from sales of equity
securities$890,000(2)Proceeds from sales of property, plant and
equipment:Cost of property, plant and equipment sold or
retired$1,500,000Less: Accumulated depreciation on property, plant
andequipment sold or retired$600,000Book value of property, plant
and equipment sold or retired$900,000Less: Loss on sales of
property, plant and equipment$100,000Proceeds from sales of
property, plant and equipment$800,000b.Schedule of noncash
investing and financing activities:Purchases of property, plant and
equipment$2,200,000Less: Portion financed through issuance of
long-term note payable$1,500,000Cash paid to acquire property,
plant and equipment$700,000c.Cash must be generated to cover the
companys investment needs through operating or financing
activities. Ideally, cash to support investing activities should
come from normal operations. If this places undue strain on the
companys operations, however, financing via borrowing and/or sale
of shares are alternatives the company should consider.
&C&9 The McGraw-Hill Companies, Inc., 2010&A
P13.3B25 Minutes, EasyPROBLEM 13.3BRPZ IMPORTSa.RPZ
IMPORTSPartial Statement of Cash FlowsFor the Year Ended 31
December 2013Cash flows from investing activities:Purchases of
equity securities$(590,000)Proceeds from sales of equity securities
(1)$520,000Loans made to borrowers$(400,000)Collections on
loans$310,000Cash paid to acquire property, plant and equipment
(see part b)$(500,000)Proceeds from sales of property, plant and
equipment (2)$310,000Net cash used for investing
activities$(350,000)Supporting computations:(1)Proceeds from sales
of equity securities:Cost of securities sold (credit entries
toEquity Securities account)$600,000Less: Loss on sales of equity
securities$80,000Proceeds from sales of equity
securities$520,000(2)Proceeds from sales of property, plant and
equipment:Cost of property, plant and equipment sold or
retired$1,000,000Less: Accumulated depreciation on property, plant
andequipment sold or retired$750,000Book value of property, plant
and equipment sold or retired$250,000Plus: Gain on sales of
property, plant and equipment$60,000Proceeds from sales of
property, plant and equipment$310,000b.Schedule of noncash
investing and financing activities:Purchases of property, plant and
equipment$1,400,000Less: Portion financed through issuance of
long-term note payable$900,000Cash paid to acquire property, plant
and equipment$500,000c.Management has more control over the timing
and amount of outlays for investing activities than for operating
activities. Many of the outlays for operating activities are
contractual, reflecting payroll agreements, purchase invoices,
taxes, and monthly bills. Most investing activities, in contrast,
are discretionaryboth as to timing and dollar amount.
&C&9 The McGraw-Hill Companies, Inc., 2010&A
P13.4B30 Minutes, MediumPROBLEM 13.4BROYCE INTERIORS CO.a.ROYCE
INTERIORS CO.Partial Statement of Cash FlowsFor the Year Ended 31
December 2013Cash flows from operating activities:Cash receipts
from customers (1)$2,590,000Interest and dividends received
(2)$91,000Cash from operating activities$2,681,000Cash paid to
suppliers and employees (3)$(1,576,000)Interest paid
(4)$(58,000)Income taxes paid (5)$(112,000)Cash disbursed for
operating activities$(1,746,000)Net cash from operating
activities$935,000(1)Cash receipts from customers:Net
sales$2,600,000Less: Increase in accounts receivable$10,000Cash
receipts from customers$2,590,000(2)Interest and dividends
received:Dividend income$55,000Interest
income$40,000Subtotal$95,000Less: Increase in accrued interest
receivable$4,000Interest and dividends received$91,000(3)Cash paid
to suppliers and employees:Cash paid to suppliers of goods:Cost of
goods sold$1,300,000Add: Increase in inventories$25,000Net
purchases$1,325,000Less: Increase in accounts payable to
suppliers$5,000Cash paid to suppliers of goods$1,320,000Cash paid
for operating expenses:Operating expenses$300,000Less: Depreciation
expense$49,000Subtotal$251,000Add: Increase in short-term
prepayments$1,000Add: Decrease in accrued operating expenses
payable$4,000$256,000Cash paid to suppliers and
employees$1,576,000(4)Interest paid:Interest expense$60,000Less:
Increase in accrued interest payable$2,000Interest
paid$58,000(5)Income taxes paid:Income tax expense$110,000Add:
Decrease in accrued income taxes payable$2,000Income taxes
paid$112,000Note to instructors: Alternatively, interest and
dividends received, and interest paid could be classified as
investing cash flows and financing cash flows, respectively.
&C&9 The McGraw-Hill Companies, Inc., 2010&A
P13.4B (p.2)PROBLEM 13.4BROYCE INTERIORS CO.
(concluded)b.Management could increase cash flows from operations
by (only two required):Reducing the amount of inventories being
held.Reducing the amount of short-term prepayments of
expenses.Taking greater advantage of accounts payable as a
short-term means of financing purchases of goods and services.More
aggressive collection of accounts receivable.
&C&9 The McGraw-Hill Companies, Inc., 2010&A
P13.5B25 Minutes, MediumPROBLEM 13.5BROYCE INTERIORS
CO.(INDIRECT)a.ROYCE INTERIORS CO.Partial Statement of Cash
FlowsFor the Year Ended 31 December 2013Cash flows from operating
activities:Profit$928,000Add:Depreciation expense$49,000Increase in
accounts payable to suppliers$5,000Increase in accrued interest
payable$2,000$56,000Subtotal$984,000Less:Increase in accounts
receivable$10,000Increase in accrued interest
receivable$4,000Increase in inventories$25,000Increase in
short-term prepayments$1,000Decrease in accrued operating expenses
payable$4,000Decrease in accrued income taxes payable$2,000Gain on
sales of equity securities$3,000$49,000Net cash from operating
activities$935,000Credit sales cause receivables to increase, while
collections cause them to decline. If receivables increase over the
year, collections during the year must have been less than credit
sales for the year. Thus, cash receipts were less than revenue
measured on the accrual basis.
&C&9 The McGraw-Hill Companies, Inc., 2010&A
P13.6B45 Minutes, StrongPROBLEM 13.6BGOLDEN TECHNOLOGIESa.GOLDEN
TECHNOLOGIESStatement of Cash FlowsFor the Year Ended 31 December
2013Cash flows from operating activities:Cash receipts from
customers (1)$3,340,000Interest received (2)$65,000Cash from
operating activities$3,405,000Cash paid to suppliers and employees
(3)$(2,334,000)Interest paid (4)$(23,000)Income taxes paid
(5)$(125,000)Cash disbursed for operating activities$(2,482,000)Net
cash from operating activities$923,000Cash flows from investing
activities:Purchases of equity securities$(50,000)Proceeds from
sales of equity securities (6)$65,000Loans made to
borrowers$(30,000)Collections on loans$27,000Cash paid to acquire
property, plant and equipment$(350,000)Proceeds from sales of
property, plant and equipment(7)$22,000Net cash used for investing
activities:$(316,000)Cash flows from financing activities:Proceeds
from short-term borrowing$56,000Payments to settle short-term
debts$(70,000)Proceeds from issuing ordinary shares
(8)$160,000Dividends paid$(300,000)Net cash used in financing
activities$(154,000)Net increase (decrease) in cash and cash
equivalents$453,000Cash and cash equivalents, beginning of
year$20,000Cash and cash equivalents, end of year$473,000Supporting
computations:(1)Cash receipts from customers:Net
sales$3,400,000Less: increase in accounts receivable$60,000Cash
receipts from customers$3,340,000(2)Interest received:Interest
income$60,000Add: Decrease in accrued interest
receivable$5,000Interest received$65,000
&C&9 The McGraw-Hill Companies, Inc., 2010&A
P13.6B (p.2)PROBLEM 13.6BFOXBORO TECHNOLOGIES(continued)(3)Cash
paid to suppliers and employees:Cash paid for purchases of
goods:Cost of goods sold$1,500,000Less: Decrease in
inventory$30,000Net purchases$1,470,000Add: Decrease in accounts
payable to suppliers$22,000Cash paid for purchases of
goods$1,492,000Cash paid for operating expenses:Operating
expenses$900,000Less: Depreciation (a noncash
expense)$75,000Subtotal$825,000Add: Increase in
prepayments$8,000Add: Decrease in accrued liab. for operating
expenses$9,000Cash paid for operating expenses$842,000Cash paid to
suppliers and employees$2,334,000(4)Interest paid:Interest
expense$27,000Less: Increase in accrued interest
payable$4,000Interest paid$23,000(5)Income taxes paid:Income tax
expense$115,000Add: Decrease in income taxes payable$10,000Income
taxes paid$125,000(6)Proceeds from sales of equity securities:Cost
of equity securities sold (credit entriesto the Equity Securities
account)$40,000Add: Gain reported on sales of equity
securities$25,000Proceeds from sales of equity
securities$65,000(7)Proceeds from sales of property, plant and
equipment:Book value of property, plant and equipment (paragraph
8)$30,000Less: Loss reported on sales of property, plant and
equipment$8,000Proceeds from sales of property, plant and
equipment$22,000(8)Proceeds from issuing ordinary shares:Amounts
credited to Share Capital account$60,000Add: Amounts credited
toShare Premium account$100,000Proceeds from issuing ordinary
shares$160,000Note to instructors: Alternatively, interest and
dividends received, and interest paid could be classified as
investing cash flows and financing cash flows, respectively.
&C&9 The McGraw-Hill Companies, Inc., 2010&A
P13.6B (p.3)PROBLEM 13.6BFOXBORO TECHNOLOGIES (concluded)b.Cash
paid to suppliers, presented in the operating activities section of
the statement of cash flows, totaled $2,334,000. Cost of goods
sold, presented in the income statement, was only $1,500,000. The
primary reasons for the difference are as follows:In addition to
cost of goods sold, operating expenses required the payment of a
significant amount of cash which accounts for much of the
difference.Adjustments to the amount of cost of goods sold plus the
amount of operating expenses were required as a result of the
following:--Decrease in inventory--Decrease in accounts
payable--Depreciation expenses (which did not require cash
payment)--Increase in prepaid operating expenses--Decrease in
accrued liabilities for operating expensesc.On the contrary, the
fact that cash flows from investing and financing activities are
negative attests to the strength of the cash position of the
company. The amount of cash increased significantly during the
year, going from a beginning balance of $20,000 to $473,000. Cash
flows from operating activities were a significant positive amount,
$923,000. In addition, the company was able to purchase equity
securities and PPE assets and make loans to borrowers (all
investing activities) and retire debt and pay dividends (financing
activities).
&C&9 The McGraw-Hill Companies, Inc., 2010&A
P13.7B40 Minutes, StrongPROBLEM 13.7BCONNECTa.CONNECTStatement
of Cash FlowsFor the Year Ended 31 December 2013Cash flows from
operating activities:Profit$5,620,000Add:Depreciation
expense$1,250,000Increase in accounts
payable$370,000Subtotal$7,240,000Less:Increase in accounts
receivable$8,650,000Decrease in accrued expenses
payable$170,000$8,820,000Net cash used in operating
activities$(1,580,000)Cash flows from investing activities:Cash
paid to acquire property, plants & equipment (see
schedule)$(20,000,000)Net cash used in investing
activities$(20,000,000)Cash flows from financing
activities:Short-term borrowing from bank$14,900,000Issuance of
ordinary shares$6,650,000Net cash from financing
activities$21,550,000Net increase (decrease) in cash$(30,000)Cash
and cash equivalents, 1 January 1, 2013$450,000Cash and cash
equivalents 31 Dec. 2013$420,000Supplementary Schedule: Noncash
Investing and Financing ActivitiesPurchase of property, plant and
quipment$25,850,000Less: Portion financed by issuing long-term
notes payable$5,850,000Cash paid to acquire property, plant and
equipment$20,000,000
&C&9 The McGraw-Hill Companies, Inc., 2010&A
P13.7B(p.2)PROBLEM 13.7BCONNECT (concluded)b.CONNECT's credit
sales resulted in $8,650,000 in new receivables, which were
uncollected as of year-end. These credit sales all were included in
the computation of profit, but those that remained uncollected at
year-end do not represent cash receipts. Therefore, the cash flow
from operating activities was substantially below the amount of
profit measured on the accrual basis.Note to instructor: It is not
uncommon for cash flows to lag behind a rising profit figure in a
growing business. This is why many rapidly growing businesses find
themselves strapped for cash to finance their growth.c.CONNECT does
not appear headed for insolvency. First, the company has a $50
million line of credit, against which it has drawn only
$14,900,000. This gives the company considerable debt-paying
ability. Next, if CONNECT's rapid growth continues, the company
should not have difficulty issuing additional ordinaryl shares to
investors as a means of raising cash. If a company is obviously
successful, it usually is able to raise the cash necessary to
finance expanding operations.
&C&9 The McGraw-Hill Companies, Inc., 2010&A
P13.8B60 Minutes, StrongPROBLEM 13.8BEXTRA-ORDINAIRE
CO.a.EXTRA-ORDINAIRE CO.Worksheet for a Statement of Cash FlowsFor
the Year Ended 31 December 2013Balance sheet
effects:BeginningDebitCreditEndingBalanceChangesChangesBalanceAssetsCash
and cash equivalents$220,000(x)$380,000$600,000Equity
securities$270,000(8)$150,000$120,000Accounts
receivable$400,000(4)$50,000$350,000Inventory$1,200,000(5)$80,000$1,280,000Property,
plant and equipment(net of accumulated
depreciation)$2,500,000(9)$200,000(3)$290,000$2,410,000$4,590,000$4,760,000Liabilities
& EquityAccounts payable$500,000(6)$200,000$700,000Accrued
expenses payable$160,000(7)$20,000$140,000Notes
payable$2,350,000(10)$100,000(9)$120,000$2,370,000Share
capital$1,080,000(11)$350,000$1,430,000Retained
Earnings$500,000(1)$340,000$120,000(2)$40,000Totals$4,590,000$1,160,000$1,160,000$4,760,000Cash
effects:SourcesUsesOperating activities:Net
loss(1)$340,000Depreciation expense(3)$290,000Decrease in accounts
rec.(4)$50,000Increase in inventory(5)$80,000Increase in accounts
payable(6)$200,000Decrease in accruedexpenses payable(7)$20,000Loss
on sale of equitysecurities(8)$40,000Investing activities:Proceeds
from sale ofequity securities(8)$110,000Cash paid for PPE
assets(9)$80,000Financing activitiesDividends paid(2)$40,000Payment
of notes payable(10)$100,000Issue of share capital(11)$350,000Net
increase in cash(x)$380,000Totals$1,040,000$1,040,000
&C&9 The McGraw-Hill Companies, Inc., 2010&A
P13.8B(p.2)PROBLEM 13.8BEXTRA-ORDINAIRE
CO.(continued)b.EXTRA-ORDINAIRE CO.Statement of Cash FlowsFor the
Year Ended 31 December 2013Cash flows from operating activities:Net
loss$(340,000)Add:Depreciation expense$290,000Decrease in accounts
receivable$50,000Increase in accounts payable$200,000Loss on sales
of equity securities$40,000Subtotal$240,000Less:Increase in
inventory$80,000Decrease in accrued expenses$20,000$100,000Net cash
from operating activities$140,000Cash flows from investing
activities:Proceeds from sales of equity securities$110,000Cash
paid to acquire PPE assets (see supplementary schedule)$(80,000)Net
cash from investing activities$30,000Cash flows from financing
activities:Dividends paid$(40,000)Payment of note
payable$(100,000)issuance of share capital$350,000Net cash from
financing activities$210,000Net increase (decrease) in
cash$380,000Cash and cash equivalents, 1 January 2010$220,000Cash
and cash equivalents, 31 Dec. 2010$600,000Supplementary Schedule:
Noncash Investing and Financing ActivitiesPurchase of PPE
assets$200,000Less: Portion financed through issuance of long-term
debt$120,000Cash paid to acquire PPE assets$80,000
&C&9 The McGraw-Hill Companies, Inc., 2010&A
P13.8B(p.3)PROBLEM 13.8BEXTRA-ORDINAIRE CO.
(continued)c.Extra-Ordinaire Co. achieved its positive cash flow
from operating activities basicallyby liquidating assets and by not
paying its bills. It has converted most of its accountsreceivable
into cash, which probably means that credit sales have
declinedsubstantially over the past several months. A decrease in
sales shows up in theincome statement immediately, but may take
months before its effects appear in astatement of cash
flows.Extra-Ordinaire Co. is not replacing PPE assets as quickly as
these assets are being depreciated. In any given year, this may not
be significant. But on the other hand, this relationship certainly
indicates that the business is not expanding, and it may indicate
that the company is deferring replacements of PPE assets in an
effort to conservecash.Extra-Ordinaire Co. is allowing its accounts
payable to rise much more quickly than it is increasing inventory.
This indicates that the company is not paying its bills as quickly
as it used to. While this conserves cash, the savings are
temporary. Also, if the companys credit rating is damaged, this
strategy may reduce both earnings and cash flows in the near
future.d.Extra-Ordinaire Co. has substantially more cash than it
did a year ago. Nonetheless, the companys financial position
appears to be deteriorating. Its equity securitiesa highly liquid
assetare almost gone. Its accounts payable are rising rapidly, and
substantially exceed the amount of cash on hand. Most importantly,
sales and accounts receivable both are falling, which impairs the
companys ability to generate cash from operating activities in the
future. Also, the liquidity of the companys inventory is
questionable in light of the declining sales.e.This company is
contracting its operations (or collapsing). Its investment in
equity securities, receivables, and PPE assets all are declining.
Further, the income statement shows that operations are eroding the
owners equity in the business. The decline in salesalready apparent
in the income statementsoon will reduce the cash collected from
customers, which is the principal factor contributing to a positive
cash flow from operating activities.In summary, this company
appears to be in real trouble.f.The companys principal revenue
sourcesales of Pulsasappears to be collapsing. If nothing is done,
it is likely that the annual net losses will increase, and that
operating cash flows soon will turn negative. Thus, managements
first decision is whether to attempt to revive the company, or
liquidate it.If the company is to be liquidated, this should be
done quickly to avoid future operating losses. Information should
be gathered to determine whether it would be best to sell the
company as a going concern or whether management should sell the
assets individually. In either event, management should stop
purchasing Pulsas. Assuming that sales continue to decline, the
companys current inventory appears to be approximately a one-year
supply.
&C&9 The McGraw-Hill Companies, Inc., 2010&A
P13.8B(p.4)PROBLEM 13.8BEXTRA-ORDINAIRE CO. (concluded)If
management decides to continue business operations, it should take
the following actions:Expand the companys product lines! The Pulsas
alone can no longer support profitable operations. Also, dependency
upon a single productespecially a faddish product with a limited
market potentialis not a sound long-term strategy.Stop buying
Pulsasat least until the current inventory is sold. This will not
improve profitability, but will help cash flows. (As explained
above, the companys current inventory appears about equal to next
years potential sales.)Look for ways to reduce operating expenses.
In 2009, sales declined by 36%, but the company was able to reduce
operating expenses by only about 3.8% ($100,000 decline from a
level of $2,600,000).Stop paying dividends. The company has no cash
to spare. As sales continue to fall,the net cash flow from
operating activities is likely to turn negative. Collectingexisting
receivables and letting payables go unpaid can only bolster net
cash flow for a limited period of time.Develop forecasts of future
operations and cash flows. If a turnaround does not appear
realistic, management should reconsider the option of liquidating
the company.s
&C&9 The McGraw-Hill Companies, Inc., 2010&A
Case 13.1SOLUTIONS TO CASES25 Minutes, StrongCASE 13.1ANOTHER
LOOK AT ALLISON COMPANYa.Based on past performance, it does not
appear that Allison Company can continue topay annual dividends of
$40,000 without straining the cash position of the company. In
atypical year, Allison generates a positive cash flow from
operating activities ofapproximately $50,000. However, about
$45,000 is required in a normal year to replacethe property, plant
and equipment retired. This leaves only about $5,000 per year of
the net operating cash flow available for dividends and other
purposes. If Allison is to continue paying cash dividends of
$40,000 per year, the company must raise about $35,000 from
investing and financing activities.Over the long run, it is quite
difficult for a company to continually finance its cashdividends
through increased borrowing (financing activity) or through sales
of assets(investing activity). Therefore, Allison Company may have
to reduce its cash dividends in future years.b.Two of the unusual
factors appearing in the current statement of cash flows should
beconsidered in assessing the companys ability to pay future
dividends. First, the companyspent an unusually large amount
($160,000) to purchase property, plant and equipment during the
year. This expenditure for property, plant and equipment may
increase net operating cash flow above the levels of prior years.
Second, the company issued $100,000 of bonds payable and an
additional 1,000 shares. The interest on the new bonds payable will
reduce future cash flows from operations. Also, the additional
shares capital mean that total dividend payments must be increased
if the company is to maintain the current level of dividends per
share.In summary, the unusual investing and financing activities
will improve the companys ability to continue its dividends only if
the new property, plant and equipment generate more cash than is
needed to meet the increased interest and dividend
requirements.
&C&9 The McGraw-Hill Companies, Inc., 2010&A
Case 13.215 Minutes, EasyCASE 13.2CASH BUDGETING FOR YOU AS A
STUDENTa.Ending cash balances:Week 2: $200 [$(200) + $1000 - $300 -
$200 - $100]Week 3: $600 ($200 + $1000 - $300 - $200 - $100)Week 4:
$1000 ($600 + $1000 - $300 - $200 - $100)b.In Week 1 you have two
problems. The first is that you do not have enough cash to pay your
rent on Wednesday. But you will by Friday, so your payment may be a
couple of days late. (But whats going to happen next month? Is
there some handwriting on the wall?)Your second problem is that if
you spend in your normal pattern, you will overdraw your bank
account by $200 (which may trigger a service charge of another $100
or more). This problem can be solved by your foregoing any
expenditures on entertainment this weekannoying, but hardly a cash
crisis.You have a bigger problem coming up in February. You will
have more difficulty payingFebruarys rent than you did Januarys.
The sad fact is that you cannot afford rent of$2,000 per month. You
are earning $4,000 per month and spending $2,400 on things other
than rent. Thus, you can afford only about $1,600 per month for
rent unless you reduce other expenses.To solve this problem, you
might find another roommate to share the rent, move into less
expensive housing, or somehow increase your monthly cash receipts.
(It does not appear practical to trim $400 per month from your
other expenses.)
&C&9 The McGraw-Hill Companies, Inc., 2010&A
Case 13.345 Minutes, MediumCASE 13.3LOOKIN' GOOD?a.Net Cash
fromProposalsProfit for the periodOperating
ActivitiesCash(1)IncreaseNo effectNo effect(2)IncreaseNo effectNo
effect(3)IncreaseIncreaseIncrease(4)No effectIncreaseIncrease(or
decrease)*(or decrease)*(or
decrease)*(5)DecreaseIncreaseIncrease(6)IncreaseIncreaseIncrease(7)No
effectNo effectIncrease*Either no effect or decrease is an
acceptable answer to the probable effect of this proposal upon
profit for the period; see discussion in paragraph (4), part
b.b.(1)If the costs of producing inventory are rising, use of the
FIFO (first-in, first-out) method assigns older and lower costs to
the cost of goods sold. Thus, it results in higher reported profits
for the period (but also in higher income taxes) than does the
weighted average cost method. The inventory method used by a
company does not affect the price that it pays to suppliers to
purchase inventory. Thus, other than for possible tax consequences,
the choice of inventory method does not affect cash flows. (The
case stated that the additional taxes stemming from use of the FIFO
method would not be paid until the following year.)(2)Changing from
an accelerated method to the straight-line method of depreciation
will (generally) reduce the amount of depreciation expense included
in the income statement, thus increasing reported profit.
Lengthening estimates of useful lives has a similar effect.
Depreciation is a noncash expense; therefore, cash flows are not
affected by the choice of depreciation method or the estimate of
useful lives, except to the extent that these choices may affect
income tax payments. The problem stated, however, that no changes
would be made in the depreciation claimed for tax
purposes.(3)Pressuring dealers (customers) to increase their
inventories will increase General Wheels sales for the year. This
should increase profit for the period and cash flows from operating
activities (collections from customers).(4)Requiring dealers to pay
more quickly will speed up cash collections from customers, thus
increasing operating cash flows and total cash. The timing of these
collections has no direct effect upon profit. However, offering
shorter credit terms may have the indirect effect of reducing net
sales. Thus, one might argue that this proposal could decrease both
profit for the period and future collections from customers.
&C&9 The McGraw-Hill Companies, Inc., 2010&A
Case 13.3 (p.2)CASE 13.3LOOKIN' GOOD? (concluded)(5)Passing up
cash discounts will delay many cash outlays by about 20 days. In
the long run the amount paid will be about 2% greater, but in the
short run the delay should more than offset these increased costs.
(A 20-day delay in cash outlays usually amounts to over 5% of total
cash outlays for the year: 20 days/365 days = 5.5%.) While
operating cash flows will increase, profit will decline; the higher
purchase costs will be reflected in the cost of goods
sold.(6)Incurring short-term interest charges of 10% to replace
long-term interest charges of 13% will reduce interest expense and
cash payments of interest. Therefore, profit, cash flows from
operating activities, and total cash flow will improve. Managements
only risks in pursuing this proposal are that short-term rates may
rise or that the company may be unable to renew the short-term
loans as they mature.(7)Dividend payments do not enter into the
determination of profit or net cash from operating activities.
Therefore, these two amounts will not be affected by the proposal.
Cash dividends are classified as financing activities and do not
affect total cash flows from operating activities. Therefore,
replacing cash dividends with stock dividends (which require no
cash payment) will increase net cash flow from all sources.
However, management should be aware that discontinuing cash
dividends may adversely affect the companys ability to raise
capital through the issuance of additional ordinary shares.
&C&9 The McGraw-Hill Companies, Inc., 2010&A
Case 13.415 Minutes, EasyCASE 13.4PEAK PRICINGa.The statement is
not valid because it addresses only the peak-period aspect of a
peak-pricing strategy. It is true that during the peak period, some
customers will be priced out of the market (or at least encou