Cash Flow Statement of REVIEW Co. for Year Ended 12/31/2006, Assignments of Financial Accounting

Download Cash Flow Statement of REVIEW Co. for Year Ended 12/31/2006 and more Assignments Financial Accounting in PDF only on Docsity! PROBLEMS P4-1 Note: This problem does not specify whether a direct or indirect method statement should be prepared. Preparation of both is recommended. Journal entries: a1. Inventory 49,000 Cash 49,000 a2. Cash 73,500 Sales 73,500 a3. Inventory 49,000 Cost of goods sold 49,000 b. Prepaid rent 4,000 Cash 4,000 c. Retained earnings 2,000 Cash 2,000 Implied: d. Salaries and wages expense 11,000 Cash 11,000 Adjustments: A1. Interest expense 4,000 Interest payable 4,000 10% of $40,000 = $4,000 A2. Wages expense 1,000 Wages payable 1,000 A3. Rent expense 6,000 Prepaid rent 6,000 $3,000 + ($4,000/8 months)*6 months = $6,000. (The following closes all revenue and expense accounts to an account called ‘Income Summary.’ The balance in Income Summary should be equal to Net Income as shown on the income statement, below. Income Summary is then closed to Retained Earnings. This is an alternative to closing the revenue and expense accounts directly to retained earnings and provides a convenient check on the net income number on the income statement.) C1. Sales Revenue 73,500 Income Summary 73,500 C2. Income Summary 49,000 COGS 49,000 C3. Income Summary 6,000 Rent Expense 6,000 C4. Income Summary 4,000 Interest Expense 4,000 C5. Income Summary 12,000 Salaries Expense 12,000 C6. Income Summary 2,500 Retained Earnings 2,500 Statement of Cash Flows: Operating, Investing, and Financing Activities 5 The indirect method cash flow worksheet is: Indirect Method Worksheet (in thousands) Explanation dr cr ref dr cr ref dr cr Prepaid Rent 3.0 2.0 Decr in PreR 1.0 Land 5.0 5.0 Wages Pay. – 1.0 Incr in WP 1.0 Interest Pay. – 4.0 Incr in IP 4.0 Note Payable 40.0 40.0 Common St. 20.0 20.0 Ret. Earnings – DIV 2.0 2.5 NI 0.5 8.0 60.0 6.0 65.5 Beg Cash 52.0 Cash End Cash 59.5 60.0 BB 52.0 65.5 Operations NI 2.5 Decr PreR 2.0 Incr WP 1.0 Incr IP 4.0 CFO 9.5 Investing – CFI Financing 2.0 DIV 2.0 CFF Ch in Cash 7.5 EB 59.5 Solution-04-Problems Sampson, Inc. Cash Flow Statement for Year Ended 12/31/04 (in thousands) Operations: Net income $ 2.5 Decrease in prepaid rent 2.0 Increase in wages payable 1.0 Increase in interest payable 4.0 Cash Flows from Operations $ 9.5 Investing: None Cash Flows for Investing – Financing: Dividends $ (2.0) Cash Flows for Financing $ (2.0) Change in Cash $ 7.5 P4-2 Journal entries (amounts in thousands) a. Accounts receivable 3,000.0 Sales 3,000.0 b. Cash 3,100.0 Accounts receivable 3,100.0 c. This is information for the cost of goods sold adjustment. See T-accounts. d. Buildings & machinery 50.0 Cash 50.0 e. Cash 1.5 Accumulated depreciation 8.0 Loss on sale of machinery 0.5 Buildings & machinery 10.0 f. This is information for the depreciation adjustment. g. This is information for the interest adjustment. Statement of Cash Flows: Operating, Investing, and Financing Activities 7 h. This is information for the interest adjustment. i. Cash 14.0 Retained earnings 14.0 j. This is information for the wages adjustment. k. Wages expense 57.0 Wages payable 57.0 l. Miscellaneous expenses 50.0 Cash 50.0 m. Interest payable 7.0 Cash 7.0 n. Inventory 2,820.0 Accounts payable 2,820.0 o. Accounts payable 2,700.0 Cash 2,700.0 p. This is information for the rent adjustment. q. Prepaid rent 25.0 Cash 25.0 r. Other accrued expenses 5.0 Cash 5.0 s. This is information for the accrued liabilities adjustment. t. Tax expense 12.0 Taxes payable 12.0 u. This is information for the taxes adjustment. Adjusting entries—(calculations below) A1. Cost of goods sold 2,800.0 Inventory 2,800.0 A2. Rent expense 27.0 Prepaid rent 27.0 A3. Wages payable 53.0 Cash 53.0 A4. Miscellaneous expenses 9.0 Other accrued liabilities 9.0 Solution-04-Problems 1. T-accounts Cash Accounts Rec. Inventory Prepaid Rent BB 68.0 BB 340.0 BB 75.0 BB 32.0 b 3,100.0 50.0 d a 3,000.0 3,100.0 b n 2,820.0 q 25.0 e 1.5 14.0 i 2,800.0 A1 27.0 A2 50.0 l 7.0 m 240.0 c 95.0 p 30.0 2,700.0 o 25.0 q 5.0 r Buildings & Machinery Accumulated Depreciation Land 53.0 A3 BB 100.0 25.0 BB BB 25.0 11.0 A5 d 50.0 10.0 e e 8.0 14.0 A6 140.0 31.0 25.0 Accounts Payable Wages Payable Interest Payable 63.0 BB 13.0 BB 3.0 BB o 2,700.0 2,820.0 n m 7.0 6.0 A7 A3 53.0 57.0 k 2.4 A8 254.5 183.0 17.0 j 4.4 Taxes Payable Other Accrued Liabilities Senior Debt Subordinated Debt 6.0 BB 5.0 BB 100.0 BB 30.0 BB 12.0 t r 5.0 A5 11.0 9.0 A4 7.0 u 9.0 s 100.0 30.0 Common Stock Add’l Paid-in Capital Retained Earnings Wages Expense 15.0 BB 115.0 BB 265.0 BB k 57.0 57.0 c3 i 14.0 22.1 c10 15.0 115.0 273.1 Statement of Cash Flows: Operating, Investing, and Financing Activities 11 Sales Cost of Goods Sold Miscellaneous Expense Depreciation Expense 3,000.0 a A1 2,800.0 l 50.0 A6 14.0 2,800.0 c2 A4 9.0 c1 3,000.0 59.0 c4 14.0 c9 Interest Expense Rent Expense Tax Expense Income Summary A7 6.0 A2 27.0 t 12.0 3,000.0 c1 A8 2.4 27.0 c5 12.0 c6 c2 2,800.0 8.4 c7 c3 57.0 c4 59.0 c5 27.0 c6 12.0 Loss on Sale of Machinery c7 8.4 e 0.5 c8 0.5 0.5 c8 c9 14.0 c10 22.1 – Solution-04-Problems 2. REVIEW Co. Balance Sheet as of 12/31/2006 Cash $254.5 Accounts Payable $183.0 Accounts Receivable 240.0 Wages Payable 17.0 Inventory 95.0 Interest Payable 4.4 Prepaid Rent 30.0 Taxes Payable 7.0 Total Current Assets $619.5 Other Accrued Liabilities 9.0 Total Current Liabilities $220.4 Buildings & Machinery $140.0 Less: Accumulated Depreciation (31.0) Senior Debt $100.0 Buildings & Machinery, net $109.0 Subordinated Debt 30.0 Land 25.0 Total Long-term Liabilities $130.0 Total Non-current Assets $134.0 Total Liabilities $350.4 Total Assets $753.5 Shareholders’ Equity Common Stock $ 15.0 Add’l Paid-in Capital 115.0 Retained Earnings 273.1 Total Shareholders’ Equity $403.1 Total Liabilities & Shareholders’ Equity $753.5 3. REVIEW Co. Income Statement for Year Ended 12/31/2006 Sales $ 3,000.0 Cost of Goods Sold (2,800.0) Gross Margin $ 200.0 Other Expenses: Wages (57.0) Depreciation (14.0) Interest (8.4) Rent (27.0) Taxes (12.0) Miscellaneous (59.0) Loss on Sale of Machine (0.5) Net Income $ 22.1 Statement of Cash Flows: Operating, Investing, and Financing Activities 15 P4-3 This problem can be done by working backwards through the indirect method cash flow worksheet. Indirect Method Worksheet Explanation dr cr ref dr cr ref dr cr Accounts Rec. 380 AR 60 440 Inventories 560 INV 80 640 Land 100 20 Land 80 Buildings & Equipment 810 Acq B&E 260 70 Sale B&E 1,000 Other Long-term Assets 280 80 Sale OLTA 200 Accumulated Depreciation 320 Sale B&E 40 120 Depr 400 Accounts Payable 510 50 AP 560 Other Current Liabilities 260 OCL 90 170 Bonds Payable 120 80 IssBonds 200 Common Stock 280 120 IssCS 400 Ret. Earnings 680 Div 400 400 NI 680 2,130 2,170 2,360 2,410 Beg Cash 40 Cash EndCash 50 2,170 BB 40 2,410 Operations NI 400 60 AR Depr 120 80 INV AP 50 90 OCL CFO 340 Investing Land 20 260 Acq B&E Sale B&E 30 Sale OLTA 80 130 CFI Financing IssBonds 80 400 Div IssCS 120 200 CFF ChinCash 10 EB 50 Solution-04-Problems ABC Widget Company Balance Sheet at December 31, 2003 Cash $ 40 Accounts receivable 380 Inventory 560 Total current assets $ 980 Buildings & equipment $ 810 Accumulated depreciation (320 ) Buildings & equipment, net $ 490 Land 100 Other long-term assets 280 Total long-term assets $ 870 Total assets $1,850 Accounts payable $ 510 Other current liabilities 260 Total current liabilities $ 770 Bonds payable $ 120 Total liabilities $ 890 Common stock $ 280 Retained earnings 680 Total stockholders’ equity $ 960 Total liabilities and stockholders’ equity $1,850 Statement of Cash Flows: Operating, Investing, and Financing Activities 17 P4-4 Indirect Method Worksheet Explanation dr cr ref dr cr ref dr cr Accounts Rec. 93.0 93.0 Inventories 151.0 151.0 Land 30.0 5.0 3 25.0 Equipment 690.0 10.0 14.0 1 730.0 EqPur 44.0 Accumulated Depreciation 460.0 1 8.0 54.0 Depr 506.0 Patents 100.0 10.0 Amort 90.0 Accounts Payable 136.0 136.0 Interest Payable 10.0 10.0 Mortgage Payable 120.0 5 10.0 110.0 Common St. 250.0 10.0 2 270.0 10.0 4 Ret. Earnings 140.0 Div 10.0 36.0 NI 166.0 1,064.0 1,116.0 1,089.0 1,198.0 Beg Cash 52.0 Cash EndCash 109.0 1,116.0 BB 1,198.0 Operations NI 36.0 3.0 3 Depr 54.0 1.0 5 Amort 10.0 1 2.0 4 10.0 CFO 108.0 Investing 1 4.0 44.0 EqPur 3 8.0 32.0 CFI Financing 10.0 Div 9.0 5 19.0 CFF ChinCash 57.0 EB 109.0 Solution-04-Problems P4-5 a. Microsoft uses the indirect method in preparing the statement of cash flows. The indirect method shows how net income must be adjusted to get back to cash flow from operations. b. Unearned revenue represents cash received from customers prior to the delivery of goods or performance of a service. Because the service has not been per- formed, unearned revenue is a liability. It is added back because the cash re- ceived is not reflected in net income, but represents an increase in cash for the year. b. Recognition of unearned revenue means that the company has performed a service in the current period where the cash was received in prior periods. The performance of the service results in a reduction of unearned revenue and an increase in revenue, thereby increasing net income. However, since the cash was received in prior periods, the income appears higher than the amount of cash received for that income. Therefore, it must be deducted. c. Answers may vary. Among the items that might be viewed positively are: 1. The company has $13.4 billion in net cash flow from operating activities. 2. The company has not relied on any financing to fund operations for the year. 3. The company has repurchased $6 billion of common stock, reducing the number of shares outstanding. This is viewed positively by remaining stock- holders. Fewer shares outstanding will result in a favorable supply/demand environment and also increase earnings per share. d. Investors may view the large purchases of investments as negative. In a growing company, investors prefer to see acquisitions of plant and equipment. Microsoft has an unusually high amount of buying and selling of investments, which is not the core business of the company. Investors would want to know the nature of such investments. The return on these investments may not be adequate to compensate for the risk associated with a high growth company. The implication is that Microsoft cannot find any suitable opportunities for long-term growth. Alternatively, the additions to property and equipment were relatively small, not good news if the company is a high growth company. Common stock investors may want to see cash dividends to offset some of the investment risk of owning common stock. Microsoft paid no common stock dividends from 1999 to 2001. The amount of depreciation and amortization in the 2001 income statement ($1,536) exceeds the amount spent investing in property and equipment ($1,103). This suggests that Microsoft may not have spent enough in 2001 to compensate for its usage of assets. Statement of Cash Flows: Operating, Investing, and Financing Activities 21 e. Gains on investments are deducted because the entire cash flow is considered an investing activity. Since the gain is included in net income, it must be de- ducted so that the cash flows from operations do not “double count” the gain. Losses on investments are added because they are losses that do not repre- sent cash outflows. A loss means that the company sold the securities for less than their balance sheet carrying value. However, the transaction resulted in a positive cash flow, all of which is reflected in the investing section. The loss is added back because it did not result in the use of cash by the company even though it resulted in a reduction of net income. f. The income statement is prepared on the accrual basis, where revenues are recognized in the period earned and expenses in the period incurred, regardless of the receipt or payment of cash. It is aimed at reflecting economic perform- ance. Therefore, the timing of cash receipts or payments may not be the same as the timing of the expense or revenue recognition. Additionally, some expenses, such as depreciation and amortization, reduce income but do not consume cash. g. 1. The exchange of common stock for land is a significant non-cash activity. Since it is a non-cash transaction, it will not be part of the cash flows. How- ever, it must be reported separately under the caption “significant non-cash investing and financing activities.” 2. Interest paid is an operating activity. It will be part of net income. Any change in interest payable will be added to or deducted from net income to arrive at the cash provided by operating activities. h. The accounting change represented an after-tax adjustment reducing Microsoft’s net income by $375 million. The adjustments are related to the valuations of derivative investments reported by Microsoft. While the adjustment resulted in a loss, it did not require the use of cash. Therefore, the adjustment is added back to net income to arrive at cash provided by operating activities. P4-6 a. The statement of cash flows helps investors and creditors assess the amounts of cash flows from three categories of activities: operating, investing and financ- ing. The cash flow statement describes the changes in an entity’s cash over a period of time by grouping the increases and decreases to cash into one of the three categories. Investors and creditors can then use the net change in cash for the individual categories and the company as a whole to make investment and credit decisions. Solution-04-Problems b. Answers may vary. Among those items that might be of interest to a banker would be: 1. The company had positive cash provided by operations in 2000 and 2001. 2. The company was able to pay off $90,000,000 of long-term debt over the two years. 3. The total cash position of the company increased in both 2000 and 2001. 4. The company repaid $1,234,000 of short-term bank borrowings over the two years. 5. Cash provided by operating activities is the company’s primary source of funds. c. Existing creditors would be encouraged by any of the items listed in b. Also, the Management Discussion and Analysis points out that the company was in com- pliance with all loan covenants as of March 31, 2001. d. The primary source of funds is cash provided by operations. e. THC paid no dividends in 2000 or 2001. MD & A indicates that the company may not pay dividends or make other payments with respect to capital stock that exceed 33 percent of the Company’s cumulative consolidated net income. To avoid violating the loan covenant, it would not be wise for the company to pay a dividend at this time. P4-7 Net income: $910,000 + Amortization expense 40,000 – Increase in Accounts receivable (10,000) – Increase in inventory (2,000) – Decrease in accounts payable (20,000) + Increase in interest payable 2,000 = Cash provided by operations before depreciation adjustment $920,000 + Depreciation expense 100,000 = Cash provided by operations $1,020,000 Note to Instructor: Dividends are a financing activity; the change in dividends payable is not relevant to computing the cash provided by operating activities.