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DQ 1 WK 4
Direct vs Indirect
What are the differences between the direct and indirect method of presenting a statement of cash flows? Which method of presenting a statement of cash flows is the best? Why? Which method appears to be most preferred ?
DQ 2 WK 4
Cash Flow Statement
What does a statement of cash flows tell you about a company? Why is the statement of cash flows important? Can a company have profits but no cash? Why?
Question 1
The major classifications of activities reported in the statement of cash flows are operating, investing, and financing. Classify each of the transactions listed below as:
|1. | |Operating activity-add to net income. |
|2. | |Operating activity-deduct from net income. |
|3. | |Investing activity. |
|4. | |Financing activity. |
|5. | |Reported as significant noncash activity |
The transactions are as follows.
| | |Transactions | |Classifications of Activities |
|(a) | |Issuance of common stock. | |[pic][pic] |
|(b) | |Purchase of land and building. | |[pic][pic] |
|(c) | |Redemption of bonds | |[pic][pic] |
|(d) | |Sale of equipment. | |[pic][pic] |
|(e) | |Depreciation of machinery. | |[pic][pic] |
|(f) | |Amortization of patent. | |[pic][pic] |
|(g) | |Issuance of bonds for plant assets. | |[pic][pic] |
|(h) | |Payment of cash dividends. | |[pic][pic] |
|(i) | |Exchange of furniture for office equipment. | |[pic][pic] |
|(j) | |Purchase of treasury stock. | |[pic][pic] |
|(k) | |Loss on sale of equipment. | |[pic][pic] |
|(l) | |Increase in accounts receivable during the year. | |[pic][pic] |
|(m) | |Decrease in accounts payable during the year. | |[pic][pic] |
|Question 2 |[|
|A comparative balance sheet for Shabbona Corporation is presented below. |p|
| |i|
| |c|
|December 31 |]|
| | |
|Assets | |
| | |
|2014 | |
| | |
|2013 | |
| | |
|Cash | |
| | |
|$ 73,000 | |
| | |
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|$ 22,000 | |
| | |
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|Accounts receivable | |
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|82,000 | |
| | |
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|66,000 | |
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|Inventory | |
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|180,000 | |
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|189,000 | |
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|Land | |
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|71,000 | |
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|110,000 | |
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|Equipment | |
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|260,000 | |
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|200,000 | |
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|Accumulated Depreciation-Equipment | |
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|(69,000 | |
|) | |
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|(42,000 | |
|) | |
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| Total | |
| | |
|$597,000 | |
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|$545,000 | |
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|Liabilities and Stockholders' Equity | |
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|Accounts payable | |
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|$ 34,000 | |
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|$ 47,000 | |
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|Bonds payable | |
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|150,000 | |
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|200,000 | |
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|Common stock ($1 par) | |
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|214,000 | |
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|164,000 | |
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|Retained earnings | |
| | |
|199,000 | |
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|134,000 | |
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| Total | |
| | |
|$597,000 | |
| | |
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|$545,000 | |
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|Additional information: | |
|1. | |
| | |
|Net income for 2014 was $125,000. | |
| | |
|2. | |
| | |
|Cash dividends of $60,000 were declared and paid. | |
| | |
|3. | |
| | |
|Bonds payable amounting to $50,000 were retired through issuance of common stock. | |
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|[pic] |
|[|Prepare a statement of cash flows for 2014 for Shabbona Corporation. (Show amounts that decrease cash flow with either a - sign e.g. |[|
|p|-15,000 or in parenthesis e.g. (15,000).) |p|
|i|Shabbona Corporation |i|
|c|Statement of Cash Flows |c|
|]|For the Year Ended December 31, 2014 |]|
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| |$[pic][pic] | |
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| |Adjustments to reconcile net income to | |
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| | Issued common stock to retire $[pic][pic] of bonds outstanding | |
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| |LINK TO TEXT | |
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|[pic] |
|[|Determine Shabbona Corporation’s current cash debt coverage ratio, cash debt coverage ratio, and free cash flow.(Round ratios to 2 |
|p|decimal places., e.g. 0.67.) |
|i|Current cash debt coverage ratio |
|c| |
|]|[pic][pic] |
| | :1 |
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| |Cash debt coverage ratio |
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| |[pic][pic] |
| | :1 |
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| |Free cash flow |
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| |$[pic][pic] |
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| |Comment on its liquidity and financial flexibility. |
| |Shabbona has [pic][pic] liquidity. Its financial flexibility is [pic][pic]. |
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Question 3
Each of the following items must be considered in preparing a statement of cash flows (indirect method) for Turbulent Indigo Inc. for the year ended December 31, 2014. State where each item is to be shown in the statement of cash flows, if at all.
| | |Items | | |
|(a)| |Plant assets that had cost $20,000 6 years before and were being | |[pic][pic] |
| | |depreciated on a straight-line basis over 10 years with no | | |
| | |estimated scrap value were sold for $5,300. | | |
| | | | | |
|(b)| |During the year, 10,000 shares of common stock with a stated value| |[pic][pic] |
| | |of $10 a share were issued for $43 a share. | | |
| | | | | |
|(c)| |Uncollectible accounts receivable in the amount of $27,000 were | |[pic][pic] |
| | |written off against Allowance for Doubtful Accounts. | | |
| | | | | |
|(d)| |The company sustained a net loss for the year of $50,000. | |[pic][pic] |
| | |Depreciation amounted to $22,000, and a gain of $9,000 was | | |
| | |realized on the sale of land for $39,000 cash. | | |
| | | | | |
|(e)| |A 3-month U.S. Treasury bill was purchased for $100,000. The | |[pic][pic] |
| | |company uses a cash and cash-equivalent basis for its cash flow | | |
| | |statement. | | |
| | | | | |
|(f)| |Patent amortization for the year was $20,000. | |[pic][pic] |
| | | | | |
|(g)| |The company exchanged common stock for a 70% interest in Tabasco | |[pic][pic] |
| | |Co. for $900,000. | | |
| | | | | |
|(h)| |During the year, treasury stock costing $47,000 was purchased. | |[pic][pic] |
Question 4
Condensed financial data of Pat Metheny Company for 2014 and 2013 are presented below.
|PAT METHENY COMPANY |
|COMPARATIVE BALANCE SHEET |
|AS OF DECEMBER 31, 2014 AND 2013 |
| | |2014 | |2013 |
|Cash |
|Sales revenue | |$6,900 |
|Cost of goods sold | |4,700 |
|Gross margin | |2,200 |
|Selling and administrative expenses | |930 |
|Income from operations | |1,270 |
|Other revenues and gains | | |
| Gain on sale of investments | |80 |
|Income before tax | |1,350 |
|Income tax expense | |540 |
|Net income | |$810 |
|Cash dividends | |260 |
|Income retained in business | |$550 |
Additional information:
During the year, $70 of common stock was issued in exchange for plant assets. No plant assets were sold in 2014.
Prepare a statement of cash flows using the indirect method. (Show amounts that decrease cash flow with either a - sign e.g. -15,000 or in parenthesis e.g. (15,000).)
|PAT METHENY COMPANY |
|Statement of Cash Flows |
|For the Year Ended December 31, 2014 |
|(Indirect Method) |
|[pic][pic] | | |
|[pic][pic] | |$[pic][pic] |
|Adjustments to reconcile net income to | | |
|[pic][pic] | | |
|[pic][pic] |$[pic][pic] | |
|[pic][pic] |[pic][pic] | |
|[pic][pic] |[pic][pic] | |
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|[pic][pic] | |[pic][pic] |
|[pic][pic] | |$[pic][pic] |
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|[pic][pic] | | |
|[pic][pic] | |$[pic][pic] |
Question 5
Condensed financial data of Pat Metheny Company for 2014 and 2013 are presented below.
|PAT METHENY COMPANY |
|COMPARATIVE BALANCE SHEET |
|AS OF DECEMBER 31, 2014 AND 2013 |
| | |2014 | |2013 |
|Cash |
|Sales revenue | |$6,900 |
|Cost of goods sold | |4,700 |
|Gross margin | |2,200 |
|Selling and administrative expenses | |930 |
|Income from operations | |1,270 |
|Other revenues and gains | | |
| Gain on sale of investments | |80 |
|Income before tax | |1,350 |
|Income tax expense | |540 |
|Net income | |$810 |
|Cash dividends | |260 |
|Income retained in business | |$550 |
Additional information:
During the year, $70 of common stock was issued in exchange for plant assets. No plant assets were sold in 2014.
Prepare a statement of cash flows using the direct method. (Show amounts that decrease cash flow with either a - sign e.g. -25,000 or in parenthesis e.g. (25,000).)
|PAT METHENY COMPANY |
|Statement of Cash Flows |
|For the Year Ended December 31, 2014 |
|(Direct Method) |
|[pic][pic] | | |
|[pic][pic] | |$[pic][pic] |
|[pic][pic] |$[pic][pic] | |
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|[pic][pic] | |$[pic][pic] |
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|[pic][pic] | |$[pic][pic] |
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