Financial Reporting, Financial Statement Analysis and Valuation 8th Edition Test Bank Download:

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1 Financial Reporting, Financial Statement Analysis and Valuation 8th Edition Test Bank Download: Completed downloadable package SOLUTIONS MANUAL Financial Reporting, Financial Statement Analysis and Valuation 8th Edition by James M. Wahlen, Stephen P. Baginski, Mark Bradshaw: Chapter 3 Income Flows versus Cash Flows: Understanding the Statement of Cash Flows MULTIPLE CHOICE 1. One rationale for the statement of cash flows is to a. ensure that the cash account balances at year-end. b. reconcile differences between net income and cash receipts and disbursements. c. calculate the company s free cash flow. d. examine the cash effects of income from discontinued operations, extraordinary items and changes in accounting principles. B 2. Which of the following is not one of the reasons why net income differs from cash flows from operations under the indirect method of calculating cash flows? a. non-cash items, such as depreciation and amortization b. changes in working capital accounts c. gains and losses related to the sale of plant, property and equipment d. sale or repurchase of capital stock D 3. A company in the growth phase of its product life cycle will normally have the following pattern of cash flows a. Negative cash flows from operations, negative cash flows from investing and positive cash flows from financing. b. Negative or positive cash flows from operations, negative cash flows from investing and positive cash flows from financing. c. Positive cash flows from operations, positive cash flows from investing and positive cash flows from financing. d. Negative or positive cash flows from operations, negative cash flows from investing and negative cash flows from financing. 3-1

2 B 4. Which of the following is an adjustment that would need to be made to net income when calculating cash flows from operations under the indirect method? a. Subtract amortization expense b. subtract gain on sale of subsidiary c. add an increase in accounts receivable d. add a decrease in accounts payable B 5. If a firm is growing and expanding its accounts receivable and inventories faster than its current operating liabilities its cash flow from operation will normally be a. greater than net income b. less than net income c. greater than the change in working capital from operations d. greater than the change in cash B 6. Firms with short operating cycles will experience less of a lag between the creation and delivery of their products and the collection of cash from customers because a. their cash flow from operations will be much greater than their working capital from operations. b. their cash flow from operations will not differ much from their working capital from operations. c. their cash flow from operations will be much less than their working capital from operations. d. there will be no relation between their cash flow from operations and working capital from operations. B 7. Normally, cash flows from operations will peak during which phase of the product life cycle? a. Introduction b. Growth c. Maturity d. Decline C 8. Normally, cash flows from investing activities will start providing cash during which phase of the product life cycle? a. Introduction b. Growth c. Maturity d. Decline C 9. Normally, cash flows from financing will start using cash during which phase of the product life cycle? a. Introduction b. Growth 3-2

3 c. Maturity d. Decline C 10. Free cash flows to all debt and common equity shareholders represents the excess of cash flows from a. operating activities over cash flows for financing activities b. investing over cash flows for operating activities c. investing over cash flows for financing activities d. operating activities over cash flows for investing activities D 11. When preparing the statement of cash flows using the indirect method, an increase in inventories would appear as a. a decrease in the operating activities section b. an increase in the operating activities section c. a use of cash in the investing activities section d. a source of cash in the investing activities section A 12. When preparing the statement of cash flows using the indirect method, an increase in accounts payable would appear as a. a decrease in the operating activities section b. an increase in the operating activities section c. a use of cash in the investing activities section d. a source of cash in the investing activities section B 13. When preparing the statement of cash flows using the indirect method, the payment of dividends would appear as a. a decrease in the operating activities section b. an increase in the operating activities section c. a use of cash in the financing activities section d. a source of cash in the financing activities section C 14. When preparing the statement of cash flows using the indirect method, the sale of marketable securities would appear as a. a use of cash in the investing activities section b. a source of cash in the investing activities section c. a use of cash in the financing activities section d. a source of cash in the financing activities section B 15. In a statement of cash flows, interest received from sources other than a company s investments would be classified as cash inflows from a. lending activities. b. operating activities. 3-3

4 c. investing activities. d. financing activities. B 16. An example of an item that is deducted from net income when preparing the operating activities section of the statement of cash using the indirect method is a. depreciation expense. b. compensation expense related to stock option plans. c. income from an investment accounted for using the equity method. d. unrealized losses on trading investments C 17. Which of the following is not an expense excluded when calculating EBITDA? a. depreciation expense b. administrative expense c. interest expense d. tax expense B 18. Which of the following is the correct formula for calculating cash collections from customers? a. sales for the period plus accounts receivable at the beginning of the period b. sales for the period plus accounts receivable at the beginning of the period minus accounts receivable at the end of the period c. sales for the period plus accounts receivable at the end of the period d. sales for the period plus accounts receivable at the end of the period minus accounts receivable at the beginning of the period B 19. Outback Corp. recorded sales of $1,300,000 in 2010, in addition the company s accounts receivable balance grew from $120,000 at the beginning of 2010 to $165,000 at the end of How much cash did Outback collect from customers in 2010? a. $1,300,000 b. $1,345,000 c. $1,255,000 d. $1,135,000 C $1,300,000 + $120,000 - $165, Toro Company recognized $655,000 of cost of goods sold in 2010, in addition its implementation of a just-in-time inventory system allowed it to reduce its inventory from $325,000 at the beginning of the year to $230,000 at the end of How much cash did Toro spend for inventory in 2010? a. $655,000 b. $980,000 c. $560,000 d. $620,000 C $655,000 + $230,000 - $325,000 = $560,

5 21. Fizzzle Inc. sold a piece of equipment during the period for $230,000 and recorded a gain of $45,000 on the sale. How should this gain be treated when preparing the operating activities section of the statement of cash flows using the indirect method? a. A sale of equipment is an investing activity; the transaction will not affect the operating activities section. b. The gain is added back to net income in the operating activities section. c. The gain is subtracted from net income in the operating activities section. d. The entire sales price is subtracted from net income in the operating activities section. C 22. The expense incurred by issuing stock options should be a. classified as a financing activity. b. added back to net income in the operating activities section. c. subtracted from net income in the operating activities section. d. does not appear in the statement of cash flows. B 23. Lagos Corp. recorded sales of $345,000 in 2010, in addition its accounts receivable and accounts payable balances at the beginning and end of 2010 were as follows: Jan. 1, 2010 Dec. 31, 2010 Accounts Receivable $65,000 $90,000 Accounts Payable $32,000 $28,000 How much cash did Lagos collect from customers in 2010? a. $345,000 b. $320,000 c. $324,000 d. $316,000 B $345,000 +$65,000 - $90,000 = $320, Which of the following companies would you expect to report significant amounts of cash provided by financing activities? a. A yet-to-be-profitable biotechnology company. b. A mature company operating in the oil refinery industry. c. A profitable established company in the retail industry. d. A large multinational pharmaceutical company. A 25. A firm s cash flows will differ from net income each period for all of the following reasons except: a. cash receipts from customers do not necessarily occur in the same period in which a firm recognizes revenues. b. cash expenditures to employees, suppliers, and governments do not necessarily occur in the same period in which a firm recognizes expenses. c. the company is sustaining losses each period. 3-5

6 d. cash inflows and outflows that pertain to investing and financing activities do not immediately flow through the income statement. C 26. As products move through the maturity phase, companies invest to productive capacity. a. increase b. decrease c. maintain d. Not enough information to answer this question. C 27. Under the indirect method of preparing the statement of cash flows, add backs to net income include all of the following except: a. depreciation expense b. deferred tax expense c. gains on sale of equipment d. share-based compensation C 28. All of the following are firms that may experience a long lag between the expenditures of cash and the receipt of cash from customers, except: a. restaurants b. wineries c. construction companies d. aerospace manufacturers A 29. Which of the following is an approximation of a cash-based measure of pretax operating earnings? a. Net sales less income taxes b. EBITDA c. Net income d. Gross profit B 30. Academic research has found that market rates of return on common stock are the most highly correlated with a. net income. b. cash flow from operations. c. EBITDA. d. cash flow from investing activities. A 31. When net income is high relative to operating cash flows, we describe the firm as having recorded a. income-decreasing accruals. b. income-increasing accruals. c. income-neutral accruals. d. abnormal accruals. B 3-6

7 32. When net income is low relative to operating cash flows, we describe the firm as having recorded a. income-decreasing accruals. b. income-increasing accruals. c. income neutral accruals. d. abnormal accruals. A 33. As a complement to the balance sheet and the income statement, the statement of cash flows is an informative statement for analysts for all the following reasons except: a. The statement of cash flows provides information to assess the financial health of a firm. Analysts increasingly recognize that cash flows do not necessarily track income flows. A firm with a healthy income statement is not necessarily financially healthy, and vice versa. Cash requirements to service debt, for example, may outstrip the ability of operations to generate cash. b. The existence of negative cash flows from operations can be eliminated by using this financial statement. c. The statement of cash flows highlights accounting accruals, which can provide insight into the overall sustainability and quality of a firm s reported earnings. d. Analysts who understand the types of information this statement presents and the kinds of interpretations that are appropriate find that the statement of cash flows reveals information about the economic characteristics of a firm s industry, its strategy, and the stage in its life cycle. B 34. Which of the following transactions would not create a cash flow? a. Payment of a cash dividend. b. The company purchased some of its own stock from a stockholder. c. Amortization of patent for the period. d. Sale of equipment at book value (i.e. no gain or loss). C 35. Which of the following would not be a cash flow from investing activities? a. Sale of a patent. b. Collection of interest revenue on a long-term note receivable. c. Collection of principal of a note receivable. d. Purchase of long-term investments. B 36. Which of the following is a cash flow from operating activities? a. Sale of long-term investments in common stock. b. Purchase of merchandise for resale. c. Payment of a note payable. d. Sale of a piece of land no longer used in operations. B 37. A cash inflow from financing activities includes: a. receipt of interest payments. 3-7

8 b. proceeds from selling equipment. c. proceeds from issuance of bonds payable. d. proceeds from selling investments in equity securities of another company. C 38. Kraco Corporation reported 2010 net income of $450,000, including the effects of depreciation expense of $60,000, and amortization expense on a patent of $10,000. Also, cash of $50,000 was borrowed on a 5-year note payable. Based on this data, total cash inflow from operating activities using the indirect method for 2010 was a. $570,000 b. $520,000 c. $470,000 d. $440,000 B 39. Adophus, Inc. s 2010 income statement reported total revenues of $850,000 and total expenses (including $40,000 depreciation) of $720,000. The 2010 balance sheet reported the following: accounts receivable beginning balance of $50,000 and ending balance of $40,000; accounts payable beginning balance of $22,000 and ending balance of $28,000. Therefore, based only on this information and using the indirect method, the 2010 net cash inflow from operating activities was a. $126,000 b. $186,000 c. $166,000 d. $174,000 B 40. Tinker Company reported sales revenue of $500,000 and total expenses of $450,000 (including depreciation) for the year ended December 31, During 2010, accounts receivable decreased by $5,000, merchandise inventory increased by $4,000, accounts payable increased by $6,000, and depreciation expense of $10,000 was recorded. Assuming no other data is needed and using the indirect method, the net cash inflow from operating activities for 2010 was a. $60,000 b. $67,000 c. $44,000 d. $51,000 B 41. Which of the following statements about the statement of cash flows is correct? a. A purchase of equipment is classified as a cash inflow from investing activities. b. Cash dividends paid are classified as cash flows from operating activities. c. Cash dividends received on stock investments are classified as cash flows from operating activities. d. A company with a net loss on the income statement will always have a net cash outflow from operating activities. C 3-8

9 42. Norton Company reported total sales revenue of $55,000, total expenses of $45,000, and net income of $10,000 on its income statement for the year ended December 31, During 2010, accounts receivable increased by $4,000, merchandise inventory increased by $6,000, accounts payable decreased by $2,000, and depreciation of $18,000 was recorded. Therefore, based only on this information, the net cash flow from operating activities using the indirect method for 2010 was: a. $30,000 b. $10,000 c. $16,000 d. $19,000 C 43. Krenshaw Company reported total sales revenue of $80,000, total expenses of $72,000, and net income of $8,000 for the year ended December 31, During 2009, accounts receivable increased by $3,000, merchandise inventory decreased by $2,000, accounts payable increased by $1,000, and $5,000 in depreciation expense was recorded. Assuming no other adjustments to net income are needed, the net cash inflow from operating activities using the indirect method was a. $19,000 b. $13,000 c. $10,000 d. $11,000 B 44. Which statement is false regarding the preparation of the indirect method of the statement of cash flows? a. An increase in merchandise inventory is subtracted from net income. b. Depreciation expense is added to net income. c. An increase in accounts receivable is added to net income. d. An increase in accounts payable is added to net income. C 45. Lui Company's 2010 income statement reported total sales revenue of $350,000. The comparative balance sheets showed that accounts receivable increased by $20,000. The 2010 "cash receipts from customers" would be a. $270,000 b. $250,000 c. $330,000 d. $40,000 C 46. The financial statements for Warren Company show the following: Cost of goods sold $725,000 Beginning Balance Ending Balance Merchandise Inventory $45,000 $56,

10 Accounts Receivable 53,000 50,000 Accounts Payable 37,000 42,000 Based on this information, cash paid for merchandise was a. $736,000 b. $719,000 c. $731,000 d. $741,000 C 47. Which of the following statements is true? a. A cash dividend is an operating cash outflow. b. Cash paid to repurchase treasury stock is an investing cash outflow. c. Cash paid to acquire stock in another company is a financing outflow. d. Purchase of a patent is an investing cash outflow. D 48. Which of the following statements is false? a. Purchase of equipment is an investing cash outflow. b. Sale of equipment creates investing cash outflow equal to its selling price. c. Purchase of short-term investments is an investing cash outflow. d. Purchase of a patent is an investing cash outflow. B COMPLETION 1. Under the, firms begin with net income to calculate cash flow from operations for the period. indirect method 2. A decrease in accounts receivable during a period indicates that a firm collected more as the amount of revenues included in net income. cash 3. The period in which a firm commences the manufacture of its product to the time it receives cash is called the. operating cycle 3-10

11 4. The length of the operating cycle is another factor that may cause cash flow from operations to differ from. working capital from operations 5. Amortization of bond discount and premiums would be additions or subtractions from net income in the section of the statement of cash flows operating activities 6. Cash flows from activities will normally be negative during the introduction and growth phase of the product life cycle. investing 7. activities relate to the normal operations of the firm, selling goods and providing services. Operating 8. activities relate to the acquisition and sale of noncurrent assets, particularly property, plant and equipment. Investing 9. equals current assets minus current liabilities Working capital 10. Free cash flows to all debt and common equity shareholders represents the excess of cash flow from operations over cash flows from. investing activities 11. Interest expense and interest revenue would be classified as activities in the statement of cash flows. operating 12. The acquisition of new investments would be classified as activities in the statement of cash flows. 3-11

12 investing 13. The receipt of dividends from an investee would be classified as activities in the statement of cash flows. operating 14. The payment of dividends would be classified as activities in the statement of cash flows. financing 15. Under the of preparing the statement of cash flow s operating activities section firms list the cash flows from selling goods and services and then subtract the cash outflows to providers of goods and services. direct method 16. One factor that may cause cash flow from operations to differ from net income is the length of the. operating cycle 17. Many analysts use as a crude measure of a firm s ability to pay down debt. EBITDA 18. EBITDA not only ignores four expenses but also ignores changes in accounts. operating working capital 19. Cash flow from operations should include none of the cash flows associated with marketable securities if such transactions are viewed as. investing activities 3-12

13 20. The issuance of debt would be classified as a (an) activity in the statement of cash flows. financing 21. Cash collected from customers would appear in the operating activities section of a statement of cash flows prepared using the method direct 22. The receipt of cash when employees exercise stock options is a (an) activity. financing SHORT ANSWER 1. The calculation of cash flow from operations under the indirect method involves two types of adjustments. Discuss each type of adjustment and provide an example of each type of adjustment. 1. Adjusting revenues and expenses for changes in non-working capital accounts, for example depreciation, amortization and deferred income tax. 2. Adjusting revenues and expenses for changes in operating working capital accounts, for example accounts receivable and accounts payable, inventories. 2. Discuss operating, investing, and financing cash flows in relation to the various stages of the product life cycle. 1. Operating cash flows begin negative in the introduction phase and start becoming positive in the growth phase. Operating cash flows reach their peak in the maturity phase and start to decrease at the end of the maturity phase and into the decline phase. 2. Investing cash flows begin negative in the introduction phase and stays negative in the growth phase. Investing cash flows become positive in the maturity phase and start to decrease at the end of the maturity phase and into the decline phase. 3. Financing cash flows are positive in the introduction and growth phase. Financing cash flows start to decrease at the end of the maturity phase and continue to decrease in the decline phase. 3. What is working capital from operations? Discuss what types of firms will have similar net income and working capital from operations? For which types of firms will net income and working capital from operations be significantly different? 3-13

14 Working capital from operations is defined as net income adjusted for changes in non-working capital accounts. These changes include depreciation, amortization, the equity method, deferred tax amounts, the minority interest in the earnings of consolidated subsidiaries and some restructuring charges. Companies that have mostly current operating assets, such as retailers who rent their space, will likely have similar net income and working capital from operations. Capital-intensive firms are more likely to have significantly different net incomes and working capital from operations. 4. For the following types of companies, discuss whether you think their cash flows from operations, investing, and financing will be positive (the activity provides cash) or negative (the activity uses cash). Provide support for your answer. 1. Tech Corporation is a developer of computer software for the gaming industry. The company recently launched its first software title. The company is expanding its operations by hiring additional developers and administrative staff. The company is not yet profitable, but expects to break even within two years. Investors view it as having a first mover advantage and have been happy to invest in the company. 2. Midwest Corporation is a supplier to the agricultural industry. The company is experiencing its 25th year of profitability, but is concerned that sales have contracted for the fifth year in a row. Midwest prides itself in paying dividends and having no debt on its balance sheet. 3. Semi Inc. manufactures semiconductors. The company has just introduced its ninth new product and is the leader in market share for the industry. The company continues to invest in research and development and expand by purchasing competitors. The company has yet to pay dividends, but is considering it in the future. The company s largest current asset is cash, due to its high profit margin. 1. This company is in the introduction phase. CFO--negative, CFI--negative, CFF--positive 2. This company is in the late mature to early decline phase. CFO--positive and declining, CFI--positive and declining, CFF--negative due to dividends. 3. This company is in the growth phase. CFO--positive, CFI--negative, CFF--positive maybe starting to turn negative. 5. Cilca Corporation is a supplier to the pulp and paper industry. Selected financial information about Cilca is listed below: Purchased real estate for $440,000 in cash. The cash was borrowed from a bank. Sold investments for $400,000. Paid dividends of $480,000. Issued shares of common stock for $200,000. Purchased machinery and equipment for $100,000 cash. Paid $360,000 on a bank loan. Reduced accounts receivable by $80,000. Increased accounts payable $160,000. Sales for the period were $450,000 Use the above information to calculate Cilca s: a. cash used or provided by operating activities b. cash used or provided by financing activities 3-14

15 a. cash used or provided by operating activities: Sales for the period 450,000 +reduction - in accounts receivable $80,000 = $690,000 b. cash used or provided by investing activities +Received $440,000 of cash that was borrowed from a bank to purchase real estate +Issued shares of common stock for $200,000 - Paid dividends of $480,000 - Paid $360,000 on a bank loan. = $200,000 cash used by financing activities 6. Luke Corporation is a manufacturer of home furnishings. Selected financial information about Luke is listed below: Borrowed $850,000 from a bank. Purchased equipment for $210,000 in cash. Purchase investments for $285,000. Received dividends of $51,000 from an investment in Davis Corp. Paid dividends of $55,000. Issued shares of preferred stock for $500,000. Repurchased outstanding common shares using $100,000 in cash. Purchased land for $100,000 cash. Paid $36,000 interest expense on a bank loan. Increased Inventories by $320,000 Increased accounts receivable by $217,000. Increased accounts payable $85,000. Use the above information to calculate Luke s: a. cash used or provided by investing activities b. cash used or provided by financing activities a. cash used or provided by investing activities: -Purchased investments for $285,000 - Purchased land for $100,000 - Purchased equipment for $210,000 cash. = ($595,000) cash used by investing activities. b. cash used or provided by investing activities +Received $850,000 from bank borrowing +Issued shares of preferred stock for $500,000 - Paid dividends of $55,000 - Paid $100,000 to repurchase outstanding common stock = $1,1950,000 cash provided by financing activities 3-15

16 7. Discuss the correlations that have been found between net income, net income plus or minus Type 1 adjustments (i.e., adjustments to net income for revenues, expenses, gains, and losses that are recognized in income and are associated with changes in noncurrent assets, noncurrent liabilities, and shareholders equity, but do not affect cash by the same amounts for the period), and cash flow from operations. The study by Robert M. Bowen, David Burgstahler, and Lane A. Daley, Evidence on the Relationships Between Earnings and Various Measures of Cash Flow, Accounting Review (October, 1986) revealed (1) a high correlation between net income and net income plus or minus Type 1 adjustments, and (2) a low correlation between net income and cash flow from operations, and (3) a low correlation between cash flow from operations and net income plus or minus Type 1 adjustments over time 8. Selected financial statement information for Filmco appears below: Balance Sheet accounts Jan. 1, 2010 Dec. 31, 2010 Inventory $210,000 $90,000 Accounts Receivable $85,000 $45,000 Income Statement (partial) For the year ended Dec. 31, 2010 Sales $900,000 Cost of Goods Sold $730,000 Gross Profit $170,000 Calculate the amount of cash collected from customers and the amount of cash spent on inventory for 2010 by Filmco. Cash collected from customers: $ 900,000+85,000-45,000=$940,000 Cash spent on inventory: $730,000 + $90,000 - $210,000=$610,000 PROBLEM 1. J. Jill is a women s clothing retailer. The company started as a mail order company and has expanded into mall department stores. The company now receives approximately half of its revenues from mail order and half from retail outlets. Over the time period 2010 to 2012, sales increased approximately 25%. Discuss the relationship between net income, working capital from operations, and cash flow from operations, and between cash flows from operating, investing, and financing activities over the three-year period. CASH FLOW STATEMENT (in thousands) Cash from operations 12/25/ /27/ /28/

17 Net income 8,706 7,025 18,434 Depreciation & amortization 18,663 16,131 12,672 Net increase (decrease) in assets & liab. 6,696 26,659 10,623 Other adjustments, net 1, ,996 Net cash provided by (used in) operations 35,461 50,739 45,725 Cash from investments (Increase) decrease in property & plant -28,784-34,265-34,734 Other cash inflow (outflow) -35,434-1,143-2,454 Net cash provided by (used in) investing -64,218-35,408-37,188 Cash from financing Issuances (purchases) of equity shares 3, ,800 Increase (decrease) in borrowings -1,706-1,648-1,755 Net cash provided by (used in) financing 1, , Net change cash & cash equivalents -27,321 14,553 14,582 Cash and cash equivalents at start of year 59,287 44,734 30,152 Cash and cash equivalents at year end 31,966 59,287 44,734 Some points that may be addressed: 1. J. Jill is expanding into retail space which results in additional capital expenditures to construct the interiors of the company s retail space. From J. Jill s annual report management estimates that the company spends approximately $1 million dollars decorating each store to its uniform design. These cash flows can be observed by recognizing the cash used by property and equipment investing activities section of the cash flow statement. We can also observe increasing depreciation charges, which is consistent with larger amounts of property and equipment. 2. As sales have increased so has its need for working capital. It is important to ensure that the company has adequate controls over its working capital. 3. J. Jill is experiencing a net growth in current operating liabilities (as can be noted in the operating activities section of the cash flow statement). This is attributable to expansion into retail space as rental commitments and other store opening costs are accrued for. 4. J. Jill is still issuing equity (but to a lesser degree than in 2012 and 2011) and paying down debt. 2. Olive Corporation manufactures food processing equipment. Use Olive Corporation s two most recent balance sheets and most recent income statement to prepare a statement of cash flows for The company paid dividends of $6,250 during Olive Corporation Balance Sheet As of December 31, Assets: Cash and cash equivalents $41,900 $25,000 Accounts Receivable 24,000 6,250 Inventory 30,000 36,000 Current Assets 95,900 67,

18 Equipment 42,000 38,500 Less: Accumulated depreciation -14,000-7,000 Land 25,000 10,000 Total assets $148,900 $108,750 Liabilities Accounts Payable $17,500 $22,500 Accrued Salaries Payable 5,500 8,000 Rent Expense Payable 2,200 1,000 Income Tax Payable 6,900 4,000 Current Liabilities 32,100 35,500 Long-term note payable 50,000 30,000 Total Liabilities 82,100 65,500 Stockholders Equity: Common stock 42,000 30,000 Retained earnings 24,800 13,250 Total liabilities and stockholders equity $148,900 $108,750 Olive Corporation Income Statement For the year ended December 31, 2010 Revenues $147,000 Cost of goods sold -84,000 Gross Profit $63,000 Operating Expenses Depreciation expense -7,000 Salary expense -14,600 Insurance Expense -2,500 Rent Expense -10,000 Interest Expense -4,200 Total Operating Expenses -38,300 Income from Operations 24,700 Income Tax Expense -6,900 Net income $17,800 Olive Corporation Statement of Cash Flows For the year ended December 31, 2010 Operations 3-18

19 Net income $17,800 Depreciation Expense $ 7,000 Increase in Accounts Receivable (17,750) Decrease in Inventory 6,000 Decrease in Accounts Payable (5,000) Decrease in Salaries Payable (2,500) Increase in Rent Payable 1,200 Increase in Taxes Payable 2,900 (8,150) Cash Flow from Operations $ 9,650 Investing Purchases of Equipment (3,500) Purchase of land (15,000) Cash Flows from Investing (18,500) Financing Sale of common stock 12,000 Issuance of Long-Term Debt 20,000 Payment of dividends (6,250) Cash Flows from Financing 25,750 Net change in cash 16,900 Cash balance at beginning of year 25,000 Cash balance at end of year $41, Listed below is a list of cash inflows and cash outflows for Toggle Inc. 1. Cash received from issuing debt 2. Cash received from interest earned on a bond investment 3. Cash used to purchase property 4. Cash used to repay debt 5. Cash received from collections of loans 6. Cash paid for retiring common stock 7. Cash paid to employees for salaries 8. Cash from the sale of marketable securities 9. Cash used to pay dividends 10. Cash from the sale of services to customers 11. Cash paid to government agencies for taxes 12. Cash received from the sale of equipment For each item indicate where it should appear on Toggle s statement of cash flows. Select from: a. Cash inflows from operating activities b. Cash outflows from operating activities c. Cash inflows from investing activities d. Cash outflows from investing activities e. Cash inflows from financing activities 3-19

20 f. Cash outflows from financing activities 1.e Cash received from issuing debt - Cash inflows from financing activities 2.a Cash received from interest earned on a bond investment - Cash inflows from operating activities 3.d Cash used to purchase property - Cash outflows from investing activities 4.f Cash used to repay debt - Cash outflows from financing activities 5.c Cash received from collections of loans - Cash inflows from investing activities 6.f Cash paid for retiring common stock - Cash outflows from financing activities 7.b Cash paid to employees for salaries - Cash outflows from operating activities 8.c Cash from the sale of marketable securities - Cash inflows from investing activities 9.f Cash used to pay dividends - Cash outflows from financing activities 10.a Cash from the sale of services to customers - Cash inflows from operating activities 11.b Cash paid to government agencies for taxes - Cash outflows from operating activities 12.c Cash received from the sale of equipment - Cash inflows from investing activities 4. Plano Corporation presented the following account balances for 2010 and 2009: December 31, 2010 December 31, 2009 Dividends payable $ 20,000 $ 25,000 Additional Paid-in-Capital $580,000 $230,000 Treasury Stock $185,000 $100,000 Equipment $800,000 $700,000 Accumulated Depreciation $225,000 $140,000 Common Stock $630,000 $560,000 Long-Term Notes Payable $225,000 $125,000 Additional information: 1. Cash dividends of $20,000 were declared on December 15, 2010, payable on January 15, The company issued 70,000 shares of $1 par value common stock during The company repurchased 34,000 shares of its own common stock during the period. No treasury stock was sold during the period. 4. Additional equipment was purchased by issuing a $100,000 long-term note payable. Required: 1. Prepare the financing section of Plano s 2010 statement of cash flows. 2. Indicate if any of the events will be reported as a significant noncash transaction. 1. Plano Corporation Partial Statement of Cash Flows For the period ended December 31, 2010 Financing Cash dividends paid ($25,000) Repurchase of treasury stock ($85,000) Sale of Common Stock $420,000 Cash Flow from Financing $310,

21 2. The issuance of the $100,000 long-term note in exchange for equipment should be disclosed as a significant non-cash transaction. 5. Clarion Industries manufactures computer equipment and provides financing for purchases by its customers. Clarion reported sales and interest revenues of $79,500 million for The balance sheet showed current and noncurrent receivables of $ 30,750 million at the beginning of 2010 and $ 26,900 million at the end of Compute the amount of cash collected from customers during (in $millions) Sales and Interest Revenues for $ 79,500 Plus Receivables at Beginning of ,750 Less Receivables at End of 2010 (26,900) Cash Collections from Customers during $ 83, Jarrett Company, home improvement retailer, reported cost of goods sold of $33,729 million for the fiscal year ended January 30, It reported merchandise inventories of $9,611 million at the beginning of fiscal 2010 and $10,209 million at the end of fiscal It reported accounts payable to suppliers of $5,713 million at the beginning of fiscal 2010 and $6,109 million at the end of fiscal Compute the amount of cash paid to merchandise suppliers during fiscal (amounts in $millions) Cost of Goods Sold for $ 33,729 Plus Inventory at End of ,209 Less Inventory at Beginning of (9,611) Equals Purchases during $ 34,327 Plus Accounts Payable at Beginning of ,713 Less Accounts Payable at End of (6,109) Equals Cash Payments to Suppliers during $ 33, Krenzer, Inc., a financial company, reported income tax expense of $2,648 million for 2010, comprising $2,346 million of current taxes and $302 million of deferred taxes. The balance sheet showed income taxes payable of $222 million at the beginning of 2010 and $427 million at the end of Compute the amount of income taxes paid in cash during Income Tax Payable at the Beginning of $ 222 Plus Current Portion of Income Tax Expense for ,346 Less Income Tax Payable at the End of (427) 3-21

22 Equals Cash Payments for Income Taxes during $ 2,141 Note that the deferred portion of income taxes expense relates to various deferred income tax accounts, not to Income Tax Payable. Also note that computations such as this one are approximations (due to acquisitions, divestitures, and other miscellaneous events that affect the ability to reconcile balance sheet changes with information on the statement of cash flows). Cash paid for income taxes is a required disclosure. Many firms include this (as well as cash paid for interest) as a supplemental disclosure at the bottom of the statement of cash flows; however, many firms include the amount of cash paid for income taxes in the income taxes footnote or in another footnote that reports supplemental information. 8. In 2010, Lamar Industries reported the following: Sales $700,000 ; Accounts receivable beginning of 2010 $450,000; Accounts receivable end of 2010 $369,200; Depreciation expense $55,400; Rent Expense $30,000. What is the net cash provided (used) by operating activities $750, While preparing a statement of cash flows, you encountered the following transaction: February 1, 2011: Galvinize Corporation acquired a small office building in exchange for 5,000 shares of its own common stock; par value $10 per share; market value $15 per share. A. Should this transaction be shown on the statement of cash flows? B. Why or why not? A. Yes B. Because it is a direct exchange, it is reported on the statement of cash flows in a supplemental schedule or note as "Office building, acquired for 5,000 shares of Galvinize Corporation's common stock, $75,000." 10. Bankers Company reported net income of $40,000, which included depreciation expense and depletion expense of $21,000 and $18,000, respectively. The following changes also occurred during 2010: Inventory $10,000 decrease Accounts payable 5,000 decrease Notes payable (long-term) 15,000 decrease Income taxes payable 7,000 increase Accounts receivable 10,000 increase Required: 3-22

23 Calculate cash flows from operating activities. $40,000 + $21,000 + $18,000 + $10,000 - $5,000 + $7,000 $10,000 = $81, Use the following information to prepare a statement of cash flows (indirect method) for Sink Industries for the year ended December 31, 2010: Net income for the year 2010 was $5,000. Accounts receivable decreased $2,000, while inventories increased $4,000, and accounts payable decreased $7,000. Depreciation expense included in net income was $8,000. During the year, a piece of land held for future expansion was sold for its book value of $8,000 and a new service truck was purchased for $14,000. The company borrowed $18,000 on a two-year note from the bank. Dividends of $6,000 were paid in cash. Preferred stock was issued to retire $7,000 of long-term notes payable. The beginning cash balance was $10,000 and the ending balance was $20,000. Sink Industries Statement of Cash flows For the Year Ended December 31, 2010 Cash flows from operating activities: Net income $5,000 Add or deduct items not affecting cash: Depreciation expense 8,000 Accounts receivable decrease 2,000 Inventory increase (4,000) Accounts payable decrease (7,000) Net cash flow from operating activities $4,000 Cash flows from investing activities: Cash received from sale of land 8,000 Cash paid for new truck (14,000) Net cash flow from investing activities (6,000) Cash flows from financing activities: Cash paid for dividends (6,000) Cash received from note payable borrowing 18,000 Net cash flow from financing activities 12,000 Net increase in cash during ,000 Beginning cash balance 10,000 Ending cash balance $20,

24 Schedule of Noncash Investing and Financing Activities: Issued preferred stock to retire long-term notes payable $7,000 Download links: financial reporting financial statement analysis and valuation test bank financial reporting financial statement analysis and valuation solutions pdf financial reporting, financial statement analysis and valuation 8e pdf financial reporting financial statement analysis and valuation 7th edition pdf financial reporting financial statement analysis and valuation 8th edition pdf financial reporting financial statement analysis and valuation 7e pdf financial statement analysis and valuation 4th edition free pdf 3-24