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cashflow statement accounting edition, Exercises of Economics

To provide information about the cash inflows and outflows of an entity during a period. To summarize the operating, investing, and financing activities of the business.

Typology: Exercises

2016/2017

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The Statement of
Cash Flows
Purpose of a statement of cash flows:
To provide information about the cash inows and outows of an entity
during a period.
To summarize the operating, investing, and nancing activities of the
business.
The cash ow statement helps users to assess a company’s
liquidity, nancial exibility, operating capabilities, and risk.
The statement of cash ows is useful because it provides
answers to the following important questions:
Where did cash come from?
What was cash used for?
What was the change in the cash balance?
Specically, the information in a statement of cash ows, if
used with information in the other nancial statements,
helps external users to assess:
1. A company’s ability to generate positive future net
cash ows,
2. A company’s ability to meet its obligations and pay
dividends,
3. A company’s need for external nancing,
4. The reasons for dierences between a company’s net
income and associated cash receipts and payments,
and
5. Both the cash and noncash aspects of a company’s
nancing and investing transactions.
What can we learn from SCF that is not already available in
the other financial statements?
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The Statement of

Cash Flows

Purpose of a statement of cash flows:

To provide information about the cash inflows and outflows of an entity

during a period.

To summarize the operating, investing, and financing activities of the

business.

The cash flow statement helps users to assess a company’s liquidity, financial flexibility, operating capabilities, and risk.

The statement of cash flows is useful because it provides answers to the following important questions:

Where did cash come from?

What was cash used for?

What was the change in the cash balance?

Specifically, the information in a statement of cash flows, if used with information in the other financial statements, helps external users to assess:

1. A company’s ability to generate positive future net

cash flows,

2. A company’s ability to meet its obligations and pay

dividends,

3. A company’s need for external financing,

4. The reasons for differences between a company’s net

income and associated cash receipts and payments,

and

5. Both the cash and noncash aspects of a company’s

financing and investing transactions.

What can we learn from SCF that is not already available in

the other financial statements?

It provides answers to important questions like:

Where did cash come from? What was cash used for? What was the change in the cash balance?

Couldn’t we just look the balance sheet?

The change in cash could be determined, but the statement

of cash flows provides detailed information about a

company’s cash receipts and cash payments during the

period.

Many things you want to know about a company is summarized in this one

statement

Operating, financing and investing cash flows

Net income does not always tell the whole story about operating performance.

A statement of cash flows is an excellent forecasting tool.

Review of terms

Cash and cash equivalents

It is a short-term, highly liquid investment.

It must be readily convertible to cash and it must be so near to maturity that

there is insignificant risks of changes in value due to changes in interest rate.

Company, Inc.

Statement of Cash Flows

For the year ended December 31, 199X

Cash Flows from Operating Activities

Cash received from customers

F 0 E 9Cash received as interest income *

F 0 E BCash received as dividend income

F 0 E 9Cash paid for cost of goods sold *

F 0 E ACash paid for selling expenses

F 0 E BCash paid for general & administrative expenses

Cash paid for interest (including interest on capital leases)

Cash paid for income taxes

Cash that would have been paid for taxes except for “excess tax deduction” related to stock based

compensation

Net cash provided by (or used by) operating activities

Cash Flows from Investing Activities

Cash received from sale of property, plant, & equipment

Cash received from sale of investments

Cash received from repayment of note receivables

Cash paid to acquire property, plant, and equipment

Cash paid to acquire investments

Cash paid out as a loan

Net cash provided by (or used by) investing activities

Cash Flows from Financing Activities

Cash received as proceeds from issuance of debt

Cash received as proceeds from issuance of stock

Cash received as proceeds from reissuance of treasury stock

Cash paid to repay debt (principal payment)

Cash paid on principal related to capital leases

Cash paid to reacquire stock (purchase treasury stock)

Cash paid as dividends

Cash retained due to “excess tax deduction” related to stock options

Net cash provided by (or used by) financing activities

Net increase (decrease) in cash

Beginning cash and cash equivalents balance

=Ending cash and cash equivalents balance

Schedule of Noncash Investing and Financing Activities

Assets for Liabilities &/or Equity

Liabilities &/or Equity for Assets

Liabilities for Equity and Equity for Liabilities

Capital lease (acquisition of asset and obligation for lessee)

A reconciliation of net income to cash provided by operations

*Brackets indicate items that are normally combined

Operating Activities

(Usually associated with working capital accounts like Accounts receivable, inventory, salaries payable, etc.)

Inflows:

From sale of goods and services

From receiving dividends investments

From receiving interest from investments or loans

From sale of trading securities

From reduced income taxes due to “excess tax deduction”

related to stock options

Outflows:

To suppliers for inventory and other materials

To employees for services

To other entities for services (insurance, etc.)

To government for taxes

To lenders for interest

To purchase trading securities

Interest expense is an operating item! Investment earnings (dividends & interest) is an operating item!

Buying and selling trading securities are operating activities! These things may not make sense to you – so

“memorize.”

Financing Activities

(Usually associated with long-term liability and equity items)

Inflows:

From issuance of debt (bonds and notes)

From issuance of equity securities

Common stock

Preferred stock

Re-issuance of treasury stock

Outflows:

To stockholders as dividends

To repay or retire long-term debt, including capital leases for lessee (interest on leases is classified as operating)

To reacquire capital stock (treasury stock)

An “anomaly” on SCF

Dividends are paid to stockholders and interest is paid to bondholders.

Dividends paid are shown as outflows under financing activities

However, FASB defined interest expense to be an operating activity

Interest & dividend revenue are defined to be operating activities, too.

Direct versus Indirect Presentations

FASB Statement No. 95 allows two ways to calculate and report a company’s net cash flow from operating activities on its statement of cash flows.

The Direct Method

Under the direct method, operating cash outflows are deducted from operating cash inflows to determine the net cash flow from operating activities.

If you choose the direct method, a reconciliation of cash provided by

operations to net income is a required disclosure.

This is the same schedule that appears in a statement prepared using the

indirect method

The required information items on a direct method statement of cash flow (per

FASB)

Operating Inflows

Cash collected from customers (including lessees, tenants, licensees,

and the like)

Interest and dividends received

Other operating cash receipts, if any

Operating outflows

Cash paid to employees and other suppliers of goods or services

(including insurance, advertising and the like)

Interest paid

Income taxes paid

Other operating cash payments, if any

The Indirect Method

Under the indirect method, net income is adjusted for noncash items related to operations to compute the net cash flow from operating activities.

If you choose to use the indirect method, you must also disclose interest paid

and income taxes paid during the year.

Other disclosures

Example 1 - Statement of Cash Flow – DIRECT METHOD Year ending

Year ending Palouse Pottery 12/31/06 Ref Debit Ref Credit 12/31/07 Target Cash 15,000 X 27,000 42,000 27,

Accounts Receivable 40,000 37,500 (2,500)

Allowance for doubtful accounts (3,000) (4,500) (1,500)

Merchandise Inventory 25,000 43,000 18,

Prepaid Expenses 3,000 6,000 3,

Plant, property & equipment 215,000 236,000 21,

Accumulated Depreciation (80,000) (82,000) (2,000)

215,000 278,

Accounts Payable (23,000) (31,000) (8,000)

Salaries Payable (2,000) (9,000) (7,000)

Interest payable (2,000) (1,500) 500

Income Taxes Payable (1,500) (5,500) (4,000)

Dividends Payable 0 (8,000) (8,000)

Long term liabilities (25,000) (15,000) 10,

Common stock, $1 par (100,000) (145,000) (45,000)

Retained Earnings (61,500) (63,000) (1,500)

(215,000) (278,000) 0 1997 1997

Closing entry for Rev/(Exp) Rec/(Disb)

Sales 93,

Gain/(loss) on sale of PP&E (4,000)

Realized gain/(loss) - land 20,

Cost of goods sold (35,000)

Salaries & other operating expenses

(37,000)

Bad debt expense (2,000)

Depreciation & amortization (11,000)

Interest expense (2,500)

Income taxes expense (7,000)

Net income (accrual basis) 14,

Statement of Cash Flows (INFLOWS)^ (OUTFLOWS)

Operating Activities

Investing Activities

Financing Activities

Noncash Financing/Investing

CHANGE IN CASH X 27, Totals

Additional information: a. Wrote off $500 accounts receivable as uncollectible d. Sold land for $30,000 that had been acquired for $10, b. Sold operational assets for $4,000 cash that had cost $17,000 and had a book value of $8,

e. Paid a $10,000 long-term note installment f. Purchase plant, property & equipment for $48,000 cash. c. Declared a cash dividend of $13,000 g. Issued common stock for $45,000 cash.

Financing Activities

Noncash Financing/Investing

CHANGE IN CASH X 27, Totals

Additional information: a. Wrote off $500 accounts receivable as uncollectible d. Sold land for $30,000 that had been acquired for $10, b. Sold operational assets for $4,000 cash that had cost $17,000 and had a book value of $8,

e. Paid a $10,000 long-term note installment f. Purchase plant, property & equipment for $48,000 cash. c. Declared a cash dividend of $13,000 g. Issued common stock for $45,000 cash. Example 2 - Statement of Cash Flow Year ending

Year ending Moscow Moving & Storage 12/31/06 Ref Debit Ref Credit 12/31/07 Target Cash 15,000 5,000 (10,000)

Accounts Receivable 30,000 28,500 (1,500) Allowance for doubtful accounts (1,500) (2,000) (500) Merchandise Inventory 10,000 17,000 7, Prepaid Expenses 4,500 500 (4,000)

Plant, property & equipment 220,100 289,100 69, Accumulated Depreciation (20,000) (16,000) 4, 258,100 322, Accounts Payable (10,000) (13,000) (3,000) Salaries Payable (3,000) (1,000) 2, Interest payable 0 (1,000) (1,000) Long term liabilities (30,000) (10,000) 20,

Common stock, $1 par (100,000) (181,000) (81,000) Retained Earnings (115,100) (116,100) (1,000) (258,100) (322,100) 0 1997 1997 Closing entry for Rev/(Exp) Receipt/(Disb) Sales 80, Gain/(loss) on sale of PP&E (2,000) Cost of goods sold (35,000) Salaries & other operating expenses

(26,000)

Bad debt expense (1,000)

Depreciation & amortization (5,000) Interest expense (2,000) Income taxes expense (3,000) Net income (accrual basis) 6, Statement of Cash Flows (INFLOWS)^ (OUTFLOWS) Operating Activities

Investing Activities

Financing Activities

Noncash Financing/Investing

CHANGE IN CASH Totals

Additional Information a. Wrote off $500 accounts receivable as uncollectible d. Issued common stock for $36,000 cash b. Sold operational assets for $4,000 cash e. Paid a $20,000 long-term note installment (cost $15,000, acc'd depreciation $9,000) f. Purchased operational assets, $39,000 cash c. Declared and paid a cash dividend, $5,000 g. Acquired land in exchange for 1,000 shares of common stock worth $45 each

Example 3

Avery Slings & Arrows, Inc.

Avery Slings & Arrows Income Statement For year ending 12/31/

Sales 6,600, Earnings of affiliates (equity method) 150, Realized loss on sale of equipment (65,000) Realized gain on sale of investments 53, Interest and dividend revenue 15, Total revenues 6,753,

Cost of goods sold 3,490, Salaries and wages 632, Other operating expenses 421, Bad debt expense 45, Depreciation expense 757, Amortization of intangibles 5, Accretion expense 25, Interest expense 935, Income tax expense 177,000 6,487, Net income 266,

Prepare a statement of cash flows (direct method) including the required reconciling schedule and any other required disclosures for Avery Slings & Arrows, Inc. Information from the balance sheet and income statement have been entered into a worksheet for your convenience. In addition to completing the worksheet, you MUST prepare a formal statement with headings, subtotals, etc. for full credit.

ADDITIONAL INFORMATION a. During the year, ASA paid $2,767,000 in cash for land, building, and equipment. b. On August 5, 2004, ASA issued 25,000 shares of common stock for $42 per share. c. ASA purchased $273,000 in marketable securities during the year. d. Equipment costing $500,000 was sold during the year for $59,000. The book value was $124,000. e. During the year, AAS declared cash dividends in the amount of $203,000. f. On April 1, 2004, the holders of $1,500,000 in convertible bonds elected to convert their bonds to common stock. The conversion ratio was 25 shares of common stock for each share $1,000 face value bond. g. The noncurrent investment represents 30% of the outstanding securities of the investee. This investment is accounted for on the equity method. During 2004, ASA received $29,000 in dividends from the investment. h. On May 1, 2004, ASA acquired equipment under a capital lease. At the inception of the lease, the present value of the minimum lease payments was $648,000. i. ASA acquired a patent on a new process for $500,000 on October 15, 2004. j. During 2004, ASA sold marketable securities which it had acquired for $222,000 for $275,000. k. In February, ASA issued 150,000 shares of common stock in a 50% stock dividend. l. ASA issued $3,000,000 in bonds at face value on August 1, 2004. m. ASA sold 500 shares of treasury stock which it had acquired for $20 per share for $46 per share on January 18,

n. In October, ASA acquired 1,000 shares of treasury stock at $38 per share. o. Bad debts in the amount of $33,000 were written off during the year.

Avery Slings & Arrows Year ending Year ending 12/31/03 Re f

Debit Re f

Credit 12/30/04 Target

Cash 2,850,000 x 589,000 2,261,000 (589,000) Securities Available for Sale 180,000 231,000 51, Allowance to adjust to market (80,000) 27,000 107, Accounts receivable (net) 1,900,000 1,947,000 47, Merchandise Inventory 900,000 602,000 (298,000) Prepaid Expenses 50,000 4,000 (46,000) Investments in affiliated companies (equity method)

Land, building & equipment 17,800,000 20,715,000 2,915,

Accumulated Depreciation (1,800,000) (2,181,000) (381,000) Intangible Assets 73,000 568,000 495, Total assets 23,873,000 26,295,

Accounts Payable (650,000) (347,000) 303, Salaries Payable (21,000) (18,000) 3, Interest payable (55,000) (156,000) (101,000) Income Taxes Payable (32,000) (45,000) (13,000) Dividends Payable (60,000) (128,000) (68,000) Bonds Payable (4,000,000) (7,000,000) (3,000,000) (Premium)/Discount on Bonds Payable

Convertible Bonds Payable (3,000,000) (1,500,000) 1,500, Lease obligation (1,825,000) (2,108,000) (283,000) Asset retirement obligation (250,000) (275,000) (25,000) Deferred Income Taxes (75,000) (122,000) (47,000) Other long term liabilities (2,590,000) (590,000) 2,000,