Cash Flow Guidelines

Transcription

1 SOURCES (USES) ASSETS (USES) SOURCES LIABILITIES SOURCES (USES) SHAREHOLDERS EQUITY SOURCES (USES) Cash Flow Guidelines INDIRECT METHOD NET INCOME ADD: DEPRECIATION, LOSSES, SUBTRACT GAINS X Y OPERATING ACTIVITIES: CASH PROVIDED BY (USED IN) CASH FROM OPERATING ACTIVITIES A INVESTING ACTIVITIES: CASH PROVIDED BY(USED IN) CASH FROM INVESTING ACTIVITIES B FINANCING ACTIVITIES: CASH PROVIDED BY (USED IN) CASH FROM FINANCING ACTIVITIES NET INCREASE/DECREASE IN CASH DURING THE YEAR C D CASH BALANCE, BEGINNING OF THE PERIOD F CASH BALANCE, END OF THE PEIOD E D = A + B + C and E = F + D NOTE: TO CALCULATE DIVIDENDS FOR FINANCING: R/E (this year) = R/E (last year) + NET INCOME / (LOSS) (this year) DIVIDENDS 1

2 Bank Reconciliation Thompson Hardware Co. handles hardware items and small tools and has been in business for several years. Prepare a bank reconciliation schedule at September 30 for the company from the following information: a. Balance on the bank statement, September 30 $3,240 b. Balance on the Books, September c. Deposit of September 29, missing from the Bank statement 595 d. Credit Memo Collection of Note by Bank 1,700 e. Debit Memo Service Charges 28 f. A comparison of the cancelled cheques returned with the bank statement reveals the following: 1) Cheque #516 for $483 used to purchase goods on account cleared the bank correctly, but was recorded as $843 by the bookkeeper. 2) The office manager wrote a cheque for stationery at the end of the month for $80 that she forgot to tell bookkeeper about. The cheque was not recorded in the books for the month of September. 3) The following cheques are outstanding: Cheque #603 $ 220 Cheque # Cheque # Cheque # $ 1,

3 Solutions a. Balance on the bank statement, September 30 $ 3,240 Plus: c. Deposit of September ,835 Less: Outstanding cheques: Cheque #603 $ 220 Cheque # Cheque # Cheque # 518 1,073 Adjusted balance per bank 2,762 b. Balance on the Books, September Plus: d. Collection of Note by Bank 1,700 f. Correction of cheque # 516 ( = 360) 360 2,060 2,870 Less: e. Service Charges 28 f. Unrecorded cheque Adjusted balance per books: 2,

4 Redbook Ale Brewery During the year ended December 31, 2006, Redbook Ale Brewery, a craft brewer, reported net income of $3,182 (all number in thousands) and cash at the beginning of the year of $472. By the end of the year the company had an ending cash balance of $6,864. The company also engaged in the following activities: a. Paid $18,752 in principal on debt. b. Received $46,202 in cash from initial public offering (IPO) of common shares. c. Incurred other non-current accrued operating expenses of $857. d. Paid $18,193 in cash for purchase of fixed assets. e. Accounts receivable increased by $881. f. Borrowed $16,789 from various lenders. g. Inventories increased by $574. h. Accounts payable decreased by $391 i. Made cash deposits on equipment of $5,830. j. Recorded amortization of $1,324. k. Prepaid expenses increased by $565. l. Sold (issued) shares to employees for $13 in cash. Required: Based on this information, prepare the cash flow statement for the year ended December 31, Use the indirect method to compute the cash flow from operating activities 4

5 REDBOOK ALE BREWERY Cash Flow Statement For the year ended December 31, 2006 (in thousands) Cash flows from operating activities: Net income $ 3,128 Add (deduct) noncash Items to adjust net income to cash: Depreciation 1,324 Increase (decrease) in cash resulting from changes in: Increase in accounts receivable Increase in inventory Increase in prepaids Decrease in accounts payable Increase in accrued non-current payables 867 Net cash provided by operating activities 2,952 Cash flows from investing activities: Deposit on equipment - 5,830 Purchase of fixed assets - 18,193 Net cash used in investing activities - 24,023 Cash flows from financing activities: Repayment of debt - 18,752 Proceeds from sale of share (IPO) 46,202 Proceeds from sale of shares (employees) 13 Net cash provided by financing activities 27,463 Net income (decrease) in cash for the year $ 6,392 Cash at the beginning of the year 472 Cash at the end of the year $ 6,

6 Matching Match the terms on the left with the most appropriate definitions on the right. 1. Accrual accounting a. The recording of revenue believed to be earned or expense believed to be incurred, before (or after) the cash is collected or paid 2. Expense b. expenses related to passage of time that do not vary with the volume of sales 3. Fiscal period c. The point in the revenue generation and collection process chosen to represent the earning of the revenue, and at which point revenue is recognized 4. GAAP d. Concept of recognizing expenses in the same accounting period in which the related revenues are recognized 5. Revenue e. A method whereby revenues and expenses (and related assets and liabilities) are reflected in the accounts in the period to which the relate 6. Critical event f. The cost of assets used and/or obligations created in generating revenue, whether or not paid for in cash in the period they appear on the Income statement 7. Income smoothing g. The period over which performance (net income) is measured and at the end of which position (balance sheet) is determined 8. Matching h. Principles and methods of accounting that have general support of standard-setting bodies, general practice, texts, and other sources 9. Recognition i. The manipulation of net income so that year-to-year variations in reported income are reduced 10. Period expenses j. The amount of benefit received or promised from the sale of goods or services, before the cost of providing these services Solutions 1 e; 2 f; 3 g; 4 h; 5 j; 6 c; 7 i; 8 d; 9 a; 10 b. 6

7 Match the terms on the left with the most appropriate definitions on the right. 1. Prepaid expenses a. The main choices among possible accounting methods made by co. in preparing its financial statements 2. Net income b. Revenues and income are spread out over several fiscal periods 3. Realized c. Recognition of revenue only when cash comes in 4. Accrued expenses d. A decision not to disclose certain accounting information is based on what influences or what makes a difference to the decision maker 5. Materiality e. Provision of information about economic events beyond that given in the financial statement figures 6. Percentage of completion f. Synonym for received or collected, though Revenue is usually recognized before it is collected 7. Delivery (Point of Sale) g. An expense recorded as a current asset because the benefit will be obtained in the near future 8. Cash received basis h. Equals income minus income tax expense, plus or minus extraordinary and special items 9. Significant accounting policy i. Expenses recognized in the accounts prior to paying for them 10. Disclosure j. The most common basis of recognizing revenue; Revenue is said to be earned when the good or service has been delivered Solutions 1 g; 2 f; 3 f; 4 i; 5 d; 6 b; 7 j; 8 d; 9 a; 10 b. 7

8 Amortization & Net Book Value On January 1, 2006 Transworld Excavators Inc. purchased a heavy loader from a German company at a cost of $760,000. The expected useful life of this specialty item was 20 years with $20,000 salvage value. Complete the following table given the data provided above and use the following methods: a. Method One: Straight Line b. Method Two: Declining Balance Year Beginning Net Book Value Amortization Expense on I/S Accumulated Amortization on B/S Ending Net Book Value (NBV) At acquisition One Two Three Four Total Expense $ 8

9 Solution Amortization & Net Book Value On January 1, 2006 Transworld Excavators Inc. purchased a heavy loader from a German company at a cost of $760,000. The expected useful life of this specialty item was 20 years with $20,000 salvage value. Complete the following table given the data provided above and use the following methods: a. Method One: Straight Line Year ($760,000 $20,000) = $740,000 = $37,000 Annual Expense 20 years 20 Beginning Net Book Value Amortization Expense on I/S Accumulated Amortization on B/S Ending Net Book Value (NBV) At acquisition 760,000 One 760,000 37,000 37, ,000 Two 723,000 37,000 74, ,000 Three 686,000 37, , ,000 Four 649,000 37, , ,000 Total Expense on I/S $148,000 b. Method Two: Declining Balance $(760,000 Accumulated Amortization) x 2/Useful Life = Annual Expense Year Beginning Net Book Value Amortization Expense on I/S Accumulated Amortization on B/S At acquisition 760,000 (760,000-0) x 2/20 One 760,000 = 76,000 76, ,000 Two 684,000 Three 615,600 Four 554,040 Ending Net Book Value (NBV) (760,000-76,000) x. 1 = 68, , ,600 (760, ,400) x.1 Total Expense on I/S $261,364 = 61, , ,040 (760, ,960) x.1 = 55, , ,

10 Bad Debts Estimation & Write Off For the following question calculate and record the appropriate bad debt expense entry for the year. In addition, report the ending balance in the allowance for doubtful accounts. 1. a. Petrofam Petroleum Inc. recorded credit sales of $2,550,000 in 200X. Based on past history the company estimates its bad debt rate at 0.5 % of credit sales. b. Instead of using the % of sales method to estimate bad debt expense for the year, Petrofam Petroleum Inc. Ages their Accounts Receivable. The percentages for aging are as follows: 0-30 days = 0.05%; days = 0.06%; = 0.2%; days = 0.3%. There is a credit balance in the allowance account of $1,250 prior to the recording of the bad debt expense for the 200X year. Subsequent to the bad debt expense being recorded, in was discovered that an account worth $10,000 was uncollectible. Record the write-off at the end of the 200X year. 10

11 Bad Debts Estimation & Write Off Solution For the following question calculate and record the appropriate bad debt expense entry for the year. In addition, report the ending balance in the allowance for doubtful accounts. 1. a. Petrofam Petroleum Inc. recorded credit sales of $2,550,000 in 200X. Based on past history the company estimates its bad debt rate at 0.5 % of credit sales. b. Instead of using the % of sales method to estimate bad debt expense for the year, Petrofam Petroleum Inc. Ages their Accounts Receivable. The percentages for aging are as follows: 0-30 days = 0.05%; days = 0.06%; = 0.2%; days = 0.3%. There is a credit balance in the allowance account of $1,250 prior to the recording of the bad debt expense for the 200X year. a. DR Bad Debt expense (.005 x 2.550M) $12,750 CR Allowance for Doubtful Accounts $12,750 b. DR Bad Debt expense $14,305 CR Allowance for Doubtful Accounts $14,305 Aging of A/R 0-30 days.05% x 2.550M = 1, days.06% x 2.550M = 1, days.2% x 2.550M = 5, days.3% x 2.550M = 7,650 Total $15,555 Balance in the allowance account is a credit of 1,250. Therefore, the bad debt expense required for the current year is calculated as follows: Balance needed in the allowance account as calculated from aging $15,555 Subtract credit balance existing in allowance account 1,250 Add debit balance existing in allowance account 0 Bad Debt Expense $ 14,305 Write-Off DR Allowance for Doubtful Accounts $10,000 CR Accounts Receivable $10,

12 Inventory Costing Methods Allsigns Company uses a periodic inventory system. At the end of the annual accounting period, December 31, 2006, the accounting records for the most popular item in inventory showed the following: Transactions Units Unit Cost Beginning inventory, January 1, $30 Transactions during 2006: a. Purchase, February 25 1, b. Sale, April 10 ($48 each) (1,400) c. Purchase, June 20 1, d. Sale, August 1, ($48 each) (200) e. Sales return, August 15 (related to transaction d.) 40 Required: Compute the amount of (a) goods available for sale, (b) ending inventory, and (c) cost of goods sold under each of the following inventory costing methods (show computations and round to the nearest dollar): 1. FIFO 2. LIFO 3. Weighted-Average 12

13 Solution Inventory Costing Methods a) Goods available for sale for all methods: Unit Total Units Cost Cost January 1, 2006 Beginning inventory 800 $30 $24,000 February 25, 2006 Purchase 1, ,400 June 20, 2006 Purchase 1, ,000 Goods available for sale 3,000 $98,400 b) and c) Ending inventory: 3,000 units (1, ) = 1,440 units Cost of Goods Sold: 1,400 units + (200-40) = 1,560 units 1. First-in, first-out (FIFO): Ending inventory (1,000 units x $36) + (440 units x $32) $50,080 Cost of goods sold ($98,400 - $50,080) $48, Last-in, First-out (LIFO): Ending inventory (800 units x $30) + (640 units x $32) $44,480 Cost of goods sold ($98,400 - $44,480) $53, Weighted-average cost: Average unit cost $98,400 3,000 = $32.80 Ending inventory (1,440 units x $32.80) $47,232 Cost of goods sold (1,560 units x $32.80) $51,168 Adapted from: Robert Libby, Patricia A. Libby, and Daniel G. Short, Financial Accounting, 3 rd ed. New York: McGraw- Hill/Irwin,