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PROBLEM 17-3A(a)GUM SAN LTD.Cash Flow Statement (Partial)—Indirect MethodYear Ended April 30, 2008Operating activitiesNet income$789,000Adjustments to reconcile net income to net cash provided by operating activitiesAmortization expense$145,000Gain on sale of equipment(12,000)Increase in accounts receivable(510,000)Decrease in inventory220,000Increase in prepaid expenses(170,000)Increase in accounts payable50,000Decrease in accrued expenses payable(165,000)Decrease in income taxes payable?(16,000)(458,000)Net cash provided by operating activities$331,000(b)GUM SAN LTD.Cash Flow Statement (Partial)—Direct MethodYear Ended April 30, 2008Operating activitiesCash receipts from customers$4,890,000(1)Cash paymentsTo suppliers$(3,020,000) (2)For operating expenses?(1,260,000) (3)For income taxes (279,000) (4) (4,559,000)Net cash provided by operating activities$ 331,000PROBLEM 17-3A (Continued)(b) (Continued)Calculations(1)Cash receipts from customersSales$5,400,000Deduct: increase in accounts receivable ? (510,000)Cash receipts from customers$4,890,000(2)Cash payments to suppliersCost of goods sold$3,290,000Deduct: Decrease in inventory? (220,000)Cost of purchases?3,070,000Deduct: Increase in accounts payable???(50,000)Cash payments to suppliers$3,020,000(3)Cash payments for operating expensesOperating expenses $925,000Add: Decrease in accrued expenses payable165,000Increase in prepaid expenses 170,000Cash payments for operating expenses$1,260,000(4)Cash payments for income taxesIncome tax expense$263,000Add: Decrease in income tax expense 16,000Cash payments for income taxes$279,000PROBLEM 17-4A(a)SABLE ISLAND LTD.Cash Flow Statement (Partial)—Indirect MethodYear Ended December 31, 2008Operating activitiesNet income$138,750Adjustments to reconcile net income tonet cash provided by operating activitiesAmortization expense$60,000Loss on sale of equipment?26,000Decrease in accounts receivable10,000Increase in prepaid expenses(1,500)Increase in accounts payable??5,000Decrease in income taxes payable?(5,250)Increase in interest payable??450Increase in unearned revenue 3,000 97,700Net cash provided by operating activities$236,450(b) SABLE ISLAND LTD.Cash Flow Statement (Partial)—Direct MethodYear Ended December 31, 2008Operating activitiesCash receipts from customers$913,000(1)Cash paymentsFor operating expenses$(620,500) (2)For interest(4,550) (3)For income tax (51,500) (4)(676,550)Net cash provided by operating activities$236,450PROBLEM 17-4A (Continued)(b) (Continued)Calculations:(1)Cash receipts from customersRevenues from fees$900,000Add:Decrease in accounts receivable$10,000Add: Increase in unearned revenue 3,000 13,000Cash receipts from customers$913,000(2)Cash payments for operating expenses Operating expenses per income statement$624,000Add:Increase in prepaid expenses1,500Less:Increase in accounts payable (5,000)Cash payments for operating expenses$620,500(3)Cash payments for interest expenseInterest expense per income statement$5,000Less:Increase in interest payable0 0 (450)Cash payments for income tax$4,550(4)Cash payments for income taxIncome tax expense per income statement$46,250Add:Decrease in income tax payable 005,250Cash payments for income tax$51,500PROBLEM 17-5A(a)Cash inflows (outflows) related to property, plant and equipment 2008:Equipment purchase ($80,000)Land purchase(25,000)Proceeds from equipment sale23,000** Cost of equipment sold $480,000 + $80,000 - $500,000 = $60,000Accumulated amortization removed from accounts$600,000 + $192,000 + $203,000 - $675,000 - $288,000 = $32,000NBV = $60,000 Cost – Accumulated amortization $32,000 = $28,000Cash proceeds = NBV $28,000 – Loss on Sale $5,000 = $23,000Equipment80,000Cash80,000Land50,000Cash25,000Mortgage Note Payable25,000Cash23,000Accumulated Amortization32,000Loss on Sale of Equipment5,000Equipment60,000PROBLEM 17-5A (Continued)(b)Equipment purchase Investing activities ($80,000 use)Land purchaseInvesting activities ($25,000 use)Proceeds from equipment saleInvesting activities ($23,000 source)PROBLEM 17-6A(a)Net income:Retained earnings, beginning of year$240,000Add: Net income (calculated) 80,250320,250Less: Cash dividends(6,250)Stock dividends (14,000)Retained earnings, end of year$300,000(b)Cash outflow: Payment of cash dividends $ 6,250Reacquisition of common shares ($32,000 - $1,500)30,500(c)Both of the outflows would be classified as financing activities on the cash flow statement.PROBLEM 17-7A(a) GALENTI, INC.Cash Flow Statement—Indirect MethodYear Ended December 31, 2008Operating activitiesNet income$90,310Adjustments to reconcile net income tonet cash provided by operating activitiesAmortization expense$58,700Gain on sale of equipment(8,750)Loss on sale of securities7,500Increase in accounts receivable(59,800)Increase in inventory(19,250)Decrease in prepaid expenses6,000Increase in accounts payable?4,420Decrease in accrued expenses payable (6,730)(17,910)Net cash provided by operating activities72,400Investing activitiesSale of investments$ 15,000Sale of equipment15,550Purchase of equipment (Note X)(71,000)Net cash used by investing activities(40,450)Financing activitiesSale of common shares$50,000Payment of cash dividends (4)(36,500)Net cash provided by financing activities 13,500Net increase in cash45,450Cash, January 1047,250Cash, December 31$92,700Note X: During the year, the company acquired equipment with a cost of $141,000 by paying $71,000 cash and incurring a note payable.PROBLEM 17-7A (Continued)(b)GALENTI, INC.Cash Flow Statement—Direct MethodYear Ended December 31, 2008Operating activitiesCash receipts from customers$237,700 (1)Cash paymentsTo suppliers$(114,290)(2)For operating expenses(15,400)(3)For income tax(32,670)For interest (2,940) (165,300)Net cash provided by operating activities72,400Investing activitiesSale of investments$15,000Sale of equipment15,550Purchase of equipment (Note X)(71,000)Net cash used by investing activities(40,450)Financing activitiesSale of common shares$50,000Payment of cash dividends (36,500)(4)Net cash provided by financing activities 13,500Net increase in cash45,450Cash, January 10 47,250Cash, December 31$ 92,700Note X: During the year, the company acquired equipment with a cost of $141,000 by paying $71,000 cash and incurring a note payable.PROBLEM 17-7A (Continued)Calculations:Cash receipts from customersSales$297,500Less: Increase in accounts receivable (59,800)$237,700Cash payments to suppliersCost of goods sold$ 99,460Add: Increase in inventory 19,250Cost of goods purchased118,710Less: Increase in accounts payable (4,420)$114,290 (3)Cash payments for operating expensesOperating expenses$14,670Less: Decrease in prepaid expenses(6,000)Add: Decrease in accrued expenses payable 6,730$15,400(4)Cash paid for dividendsRetained earnings, beginning$121,790Add: Net income 90,310212,100Less: Cash dividends declared (calculated) 36,500Retained earnings, ending$175,600PROBLEM 17-8A(1) Indirect methodMILK RIVER LTD.Cash Flow StatementYear Ended December 31, 2008Operating activitiesNet income$27,750Adjustments to reconcile net income to net cash provided by operating activities:Amortization expense*$15,500Gain on sale of equipment(1,000)Increase in accounts receivable(28,000)Increase in merchandise inventory(3,000)Increase in accounts payable 2,000Decrease in income taxes payable (7,000)(21,500)Net cash provided by operating activities6,250Investing activitiesSale of equipment$9,500Purchase of equipment (Note X)(6,000)Net cash provided by investing activities3,500Financing activitiesIssue of common shares$4,000Payment of dividends ** (4,750)Net cash used by financing activities (750)Net increase in cash and equivalents9,000Cash and cash equivalents, January 1020,000Cash and cash equivalents, December 31$29,000Note X:During the year, the company acquired equipment with a cost of $20,000 by paying $6,000 cash and incurring a note payable of $70,000.PROBLEM 17-8A (Continued)(a) (1) Continued*Amortization expenseCost of equipment$18,000Accumulated amortization (calculated) (9,500)Book value $ 8,500Accumulated amortization, beginning$24,000Less: amortization for equipment sold(9,500)Add: amortization expense (calculated) 15,500Accumulated amortization, ending$30,000**Cash paid for dividendsRetained earnings, beginning$38,000Add: Net income 27,75065,750Less: Cash dividends declared (4,750)Retained earnings, ending$61,000PROBLEM 17-8A (Continued)(a) (2) Direct methodMILK RIVER LTD.Cash Flow StatementYear Ended December 31, 2008Cash flows from operating activitiesCash receipts from customers (1)$214,000Cash paymentsTo suppliers (2)$(181,000)For operating expenses (3) (8,500)For interest (2,000)For income tax (4) (16,250)(207,750)Net cash provided by operating activities6,250Investing activitiesSale of equipment$9,500Purchase of equipment(6,000)Net cash provided by investing activities3,500Financing activitiesIssue of common shares$4,000Payment of dividends (4,750)Net cash used by financing activities (750)Net increase in cash and equivalents9,000Cash and cash equivalents, January 1020,000Cash and cash equivalents, December 31$29,000Note to the Cash Flow Statement:During the year, the company acquired equipment with a cost of $20,000 by paying $6,000 cash and incurring a note payable.PROBLEM 17-8A (Continued)(a) (2) (Continued)Calculations:Cash receipts from customersSales$242,000Less: Increase in accounts receivable( (28,000)Cash receipts from customers$214,000Cash payments to suppliersCost of goods sold$180,000Add: Increase in inventory (3,000Cost of goods purchased183,000Less: Increase in accounts payable (2,000)Cash payments to suppliers$181,000(3)Cash payments for operating expensesAccumulated amortization, beginning$24,000Less: amortization for equipment sold(9,500)Add: amortization expense 15,500Accumulated amortization, ending$30,000Operating expenses$24,000Less: Amortization expense ((15,500)Cash payments for operating expenses$ 8,500(4)Cash payments for income taxIncome tax expense$ 9,250Add: Decrease in income tax payable 7,000Cash payments for income tax$16,250PROBLEM 17-8A (Continued)(b)Money-market instruments are combined with cash because they are readily convertible into cash and have maturities of less than three months. Therefore, they are considered to be cash equivalents. PROBLEM 17-9A(a)Net cash provided (used) by operating activities – net cash (provided) used by investing activities = free cash flowReitmans:$106,349 – $43,509 = $62,840La Senza:$46,610 – $14,895 = $31,715(b)Reitmans appears to be in the stronger financial position. It generates more cash from operating activities, has a higher net income, more cash and cash equivalents, and a higher free cash flow.(c)Reitmans is likely growing faster than La Senza. Its net income is higher, as is its cash provided by operating activities. It is repaying debt but also investing heavily in property, plant, and equipment as evidenced by its use of investing activities. Reitmans is using a higher proportion of its cash provided by operating activities for investing activities than La Senza. However, it must be noted that the fashion industry is quite volatile, and the differences between the companies may not be representative of growth. In addition, since the amounts given are in absolute dollars, it is difficult to tell how much of the difference is due to the relative size of the two companies. ................
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