To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Chapter 12 Reporting and Analyzing Cash Flows QUESTIONS The purpose of the cash flow statement is to report all major cash receipts (inflows) and cash payments (outflows) during a period It helps users to answer questions such as: How does a company obtain its cash? Where does a company spend its cash? What explains the change in the cash balance? The direct method of reporting cash flows from operating activities itemizes the major classes of cash receipts such as sales to customers, and also itemizes the major classes of cash payments such as for merchandise, interest, taxes, and other operating expenses On a statement of cash flows prepared according to the direct method, operating activities generally include cash receipts from the sale of goods and services, cash dividends received from stock investments in other entities, and interest on loans to others Operating activities also include cash outflows such as payments for merchandise, salaries, rent, income taxes, utilities, and other operating expense items The indirect method of reporting cash flows from operating activities begins with net income and then adjusts it for items that are necessary to reconcile net income to the net cash provided or used by operating activities On a statement of cash flows, investing activities include cash outflows from purchases of long-term investments such as stocks and bonds, from purchases of plant assets such as land, buildings, and machinery, and from purchases of other noncurrent assets such as natural resources and intangible assets When these types of assets are sold, the cash inflows from the sales are also reported as investing activities On a statement of cash flows, financing activities include cash inflows such as those that result from issuing preferred or common stock, and from borrowing by issuing bonds or signing long-term or short-term notes payable Financing activities also include cash outflows such as dividend payments to stockholders, purchases of treasury stock, and repayments of debt Payments of cash dividends should be reported on the statement of cash flows as financing activities ©McGraw-Hill Companies, 2008 Solutions Manual, Chapter 12 623 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com The amount of the land purchase that was paid for in cash ($20,000) should be reported on the statement of cash flows as an investing activity Also, a schedule of noncash investing and financing activities or the notes to the statement should show the $100,000 land investment, the $80,000 financing in the form of a long-term note payable, and the net $20,000 cash outflow Since this cash inflow results from borrowing money, it is reported on the statement of cash flows as a financing activity 10 Yes; even though a company reports positive net income for the year, it may still show a net cash outflow from operating activities When net income is reconciled to the net cash flow from operating activities, the net effect of all the adjustment items may be a subtraction from net income (examples of such adjustments are accrued revenues, prepaid expenses, and other gains) If the amount of this net subtraction is larger than the net income, the result is net cash used by operating activities 11 Depreciation is not a source or a use of cash, even though it must be added to net income when the net cash flow from operating activities is calculated by the indirect method (Note: When depreciation is deducted on the tax return of a corporation, the effect is to reduce taxable income and reduce the cash outflow for income taxes But this is driven by the activity of purchasing the asset.) 12 (a) Best Buy uses the indirect method This is apparent from its adjustments to net income when its reports net cash provided by operating activities (b) The increase in receivables represents an amount by which sales for the period were more than cash receipts from customers Since sales are a positive number in the calculation of net income, an increase in the amounts not yet received from customers (the increase in receivables) must be deducted from sales to determine the net amount of cash provided by operations 13 Circuit City’s statement of cash flows shows five major financing activities for the year ended February 28, 2005: Payments on short-term debt Principal payments of long-term debt Repurchases of common stock Issuances of Circuit City common stock, net Dividends paid Net cash used for financing activities $ (1,853,000) (28,008,000) (259,832,000) 27,156,000 (13,848,000) $(276,385,000) 14 Apple’s two investing activities yielding cash outflows for the year ended September 25, 2004, are ($ millions): Purchases of short-term investments $ Purchases of property, plant, and equipment 3,270 176 ©McGraw-Hill Companies, 2008 624 Financial Accounting, 4th Edition To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com QUICK STUDIES Quick Study 12-1 (20 minutes) The statement of cash flows reports the cash (and cash equivalent) activities of a business for a specific accounting period The cash flows are classified into operating, investing, and financing activities The net change in cash as well as the beginning and ending cash balances are also reported on the statement Examples of transactions classified as investing activities Plant asset purchases Plant asset sales Investment in debt and equity securities (except trading securities) Intangible asset acquisitions and disposals Purchases and sales of natural resources Examples of transactions classified as financing activities Bond retirement and issuance Issuance and settlement of notes payable Common stock issuance Cash paid for dividends Treasury stock acquisitions Owner contributions and withdrawals Examples of significant noncash financing and investing activities Exchange of stock or debt securities for noncash assets Conversion of bonds into stock Purchase of long-term assets by issuing notes payable to seller Settle debt with noncash assets (such as giving equipment to pay off loan) Quick Study 12-2 (10 minutes) Investing Operating Operating Operating Financing 10 Financing Operating Operating Investing* Operating * For the ―indirect‖ method, the loss is reported as an adjustment (addback) to net income in the operating section ©McGraw-Hill Companies, 2008 Solutions Manual, Chapter 12 625 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Quick Study 12-3 (10 minutes) Cash flows from operating activities Net income $18,200 Adjustments to reconcile net income to operating cash flow Depreciation .$36,000 Accounts receivable decrease 7,000 Inventory increase (5,900) Accounts payable increase 4,700 Income taxes payable decrease (150) 41,650 Net cash provided from operating activities $59,850 Quick Study 12-4 (10 minutes) Computation of cash inflow from sale of furniture Cost of furniture sold (given) $52,500 Accumulated depreciation at beginning of year (given) $110,700 Increase from depreciation expense (given) 18,000 Total ―expected‖ accumulated depreciation 128,700 Actual accumulated depreciation at end of year (given) (88,700) Accumulated depreciation on sold furniture 40,000 Cash received from sale of furniture at book value $12,500 Quick Study 12-5 (10 minutes) Part Computation of cash received from the sale of common stock Increase in Common stock ($105,000 - $100,000) $ 5,000 Increase in Paid-in capital in excess of par value ($567,000 - $342,000) 225,000 Cash received from the sale of common stock $230,000 Part Computation of cash paid for dividends Beginning retained earnings $287,500 Net income 48,000 Total ―expected‖ retained earnings 335,500 Actual ending retained earnings (313,500) Cash paid for dividends $ 22,000 ©McGraw-Hill Companies, 2008 626 Financial Accounting, 4th Edition To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Quick Study 12-6 (10 minutes) Cash flows from operating activities Net income $30,000 Adjustments to reconcile net income to operating cash flow Depreciation .$37,600 Accounts receivable decrease 10,000 Inventory decrease 10,000 Prepaid expense increase (1,200) Accounts payable decrease (6,000) Wages payable increase 4,000 Income taxes payable decrease (1,200) 53,200 Net cash provided from operating activities $83,200 Quick Study 12-7 (15 minutes) Computation of cash inflow from sale of furniture Cost of furniture sold (given) $55,000 Accumulated depreciation at beginning of year (given) $ 9,000 Increase from depreciation expense (given) 37,600 Total ―expected‖ accumulated depreciation 46,600 Actual accumulated depreciation at end of year (given) (17,000) Accumulated depreciation on sold furniture 29,600 Cash received from sale of furniture at book value $25,400 Quick Study 12-8 (15 minutes) Computation of cash paid for dividends Beginning retained earnings $ 8,400 Net income 30,000 Total ―expected‖ retained earnings 38,400 Actual ending retained earnings (35,600) Decrease from (cash paid for) dividends $ 2,800 Computation of cash payments for notes Beginning notes payable $69,000 Increases to notes (given) Total ―expected‖ notes payable 69,000 Actual ending notes payable (29,000) Decrease from (cash) payments toward notes $40,000 ©McGraw-Hill Companies, 2008 Solutions Manual, Chapter 12 627 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Quick Study 12-9B (10 minutes) Cash received from customers = Sales + Accounts receivable decrease = $488,000 + ($51,000 - $41,000) = $498,000 Net increase in cash = $94,800 - $24,000 = $70,800 Quick Study 12-10B (10 minutes) Cash paid for merchandise = Cost of goods sold - Inventory decrease + Accounts payable decrease = $314,000 - ($95,800 - $85,800) + ($21,000 - $15,000) = $310,000 Cash paid for operating expenses = Operating expenses (excluding depreciation) + Prepaid expenses increase - Wages payable increase = $89,100 + ($5,400 - $4,200) - ($9,000 - $5,000) = $86,300 Quick Study 12-11B (10 minutes) Cash flows from operating activities Receipts from sales to customersa $498,000 Payments for merchandise inventoryb (310,000) Payments for other expensesc (86,300) Payments for taxesd (18,500) Net cash provided by operating activities .$ 83,200 a B From QS 12-9 B From QS 12-10 c B From QS 12-10 d $17,300 (income tax expense) + $1,200 (decrease in income taxes payable) b ©McGraw-Hill Companies, 2008 628 Financial Accounting, 4th Edition To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Quick Study 12-12 (10 minutes) Pena is probably in the strongest position of the three competing companies on the basis of the statement of cash flows Pena’s cash flows from operations are able to finance reinvestment in operating assets as well as help in paying down some debt Garcia is in the second strongest position as it is able to reinvest 57% of its operating cash flows into new productive assets Piniella is the weakest as it experienced negative cash flows from operations and generates cash by selling productive assets and by taking on new debt Garcia’s cash flow on total assets ratio is slightly stronger than that for Pena Garcia has a 9.6% ratio ($60,000/$625,000) compared to Pena’s 8.9% ratio ($70,000/$790,000) Quick Study 12-13A (10 minutes) The balance sheet equation can be arranged so that the algebraic total of all noncash items is equal to cash (see Exhibit 12.8) It follows that when all changes in noncash balance sheet items are explained, the corresponding change in cash is also explained On the spreadsheet, when the changes in all noncash balance sheet items have been accounted for, we can be confident that the change in cash also has been fully accounted for Quick Study 12-14 (20 minutes) Cash Flows from Operating Activities (Indirect) Case A Case B Case C Net Income $ 4,000 $100,000 $72,000 Adjustments to reconcile net income to net cash provided by operations Depreciation 30,000 8,000 24,000 Changes in assets and liabilities Accounts receivable (40,000) (20,000) 4,000 Inventories 20,000 10,000 (10,000) Accounts payable 24,000 (22,000) 14,000 Accrued liabilities (44,000) 12,000 (8,000) Cash provided by (used for) operations $ (6,000) $ 88,000 $96,000 ©McGraw-Hill Companies, 2008 Solutions Manual, Chapter 12 629 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Quick Study 12-15 (15 minutes) Investing Activities Purchase of used equipment $(5,000) Sale of short-term investments 6,000 Cash provided by investing activities $ 1,000 Quick Study 12-16 (15 minutes) Financing Activities Additional short-term borrowings $20,000 Cash dividends paid (16,000) Cash provided by financing activities $ 4,000 ©McGraw-Hill Companies, 2008 630 Financial Accounting, 4th Edition To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com EXERCISES Exercise 12-1 (10 minutes) Cash flows from operating activities Net income $400,000 Adjustments to reconcile net income to operating cash flow Depreciation $80,000 Accounts receivable increase (40,000) Prepaid expense decrease 12,000 Accounts payable increase 6,000 Wages payable decrease (2,000) Gain on sale of machinery (20,000) 36,000 Net cash provided from operating activities $436,000 Exercise 12-2 (25 minutes) Statement of Cash Flows Operating Investing Activities Activities a Paid cash to purchase inventory b Purchased land by issuing common stock c Accounts receivable decreased in the year d Sold equipment for cash, yielding a loss e Recorded depreciation expense f Income taxes payable increased in the year g Declared and paid a cash dividend h Accounts payable decreased in the year i Paid cash to settle bond payable j Prepaid expenses increased in the year Financing Activities Noncash Investing & Financing Activities Not reported on Statement or in Notes X X X X X X X X X X X ©McGraw-Hill Companies, 2008 Solutions Manual, Chapter 12 631 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Exercise 12-3B (15 minutes) Statement of Cash Flows Operating Investing Activities Activities a Retired long-term bonds payable by issuing stock b Depreciation expense recorded c Paid cash dividend that was declared in a prior period d Sold inventory for cash e Borrowed cash from bank by signing a 9-month note payable f Paid cash to purchase a patent g Accepted six-month note receivable in exchange for plant assets h Paid cash toward accounts payable i Collected cash from sales j Paid cash to acquire treasury stock Financing Activities Noncash Investing & Financing Activities Not reported on Statement or in Notes X X X X X X X X X X Exercise 12-4 (20 minutes) Cash flows from operating activities Net income $374,000 Adjustments to reconcile net income to net cash provided by operating activities Decrease in accounts receivable 17,100 Decrease in merchandise inventory 42,000 Increase in prepaid expenses (4,700) Decrease in accounts payable (8,200) Increase in other payables 1,200 Depreciation expense 44,000 Amortization expense 7,200 Gain on sale of plant assets (6,000) Net cash provided by operating activities $466,600 ©McGraw-Hill Companies, 2008 632 Financial Accounting, 4th Edition To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Problem 12-5BA (50 minutes) SATU COMPANY Spreadsheet for Statement of Cash Flows For Year Ended December 31, 2008 December 31, 2007 Balance sheet debits Cash $ 28,400 Accounts receivable 25,860 Merchandise inventory 140,320 Equipment 77,500 Analysis of Changes Debit Credit (b) $ 5,638 (c) $ 25,347 (g) 30,250 $272,080 Balance sheet credits Accum depreciation—Equip $ 31,000 Accounts payable 157,530 Income taxes payable 6,100 Common stock, $5 par value 25,000 Paid-in capital in excess of par value, common stock 20,000 Retained earnings 32,450 (d) (e) (f) 15,700 (h) 15,000 (h) (a) 48,000 202,767 (c) (d) (e) 25,347 137,158 4,000 (g) 30,250 (i) 60,000 $543,860 137,158 4,000 (i) 60,000 (a) (b) 202,767 5,638 $272,080 December 31, 2008 $ 58,750 20,222 165,667 107,750 $352,389 $ 46,700 20,372 2,100 40,000 68,000 175,217 $352,389 Statement of cash flows Operating activities Net income Decrease in accounts receivable Increase in merch inventory Decrease in accounts payable Decrease in income taxes payable Depreciation expense (f) 15,700 Investing activities Payment for equipment Financing activities Issued common stock for cash Paid cash dividends (h) 63,000 $543,860 ©McGraw-Hill Companies, 2008 Solutions Manual, Chapter 12 655 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Problem 12-6BB (35 minutes) SATU COMPANY Statement of Cash Flows For Year Ended December 31, 2008 Cash flows from operating activities Cash received from customers (Note 1) $756,438 Cash paid for merchandise (Note 2) (431,705) Cash paid for other operating expenses (173,933) Cash paid for income taxes (Note 3) (93,200) Net cash provided by operating activities $57,600 Cash flows from investing activities Cash paid for equipment (30,250) Cash flows from financing activities Cash received from issuing stock (3,000 x $21) Cash paid for cash dividends Net cash provided by financing activities 63,000 (60,000) 3,000 Net increase in cash Cash balance at December 31, 2007 Cash balance at December 31, 2008 $30,350 28,400 $58,750 Supporting calculations (1) Sales + Decrease in receivables = $750,800 + ($25,860 - $20,222) = $756,438 (2) Cost of Increase in Decrease in + + goods sold inventory payables = $269,200 + ($165,667 - $140,320) + ($157,530 - $20,372) = $431,705 (3) Income taxes expense + Decrease in income taxes payable = $89,200 + ($6,100 - $2,100) = $93,200 ©McGraw-Hill Companies, 2008 656 Financial Accounting, 4th Edition To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Problem 12-7B (35 minutes) SALT LAKE COMPANY Cash Flows from Operating Activities Indirect Method Cash flows from operating activities Net income $ 20,000 Adjustments to reconcile net income to net cash provided by operating activities Depreciation expense $32,000 Increase in accounts receivable (60) Decrease in merchandise inventory 12 Decrease in accounts payable (20) Increase in salaries payable 30 Increase in utilities payable 20 Decrease in prepaid rent 10 Decrease in prepaid insurance 31,996 Net cash provided by operating activities $51,996 Problem 12-8BB (35 minutes) SALT LAKE COMPANY Cash Flows from Operating Activities Direct Method Cash flows from operating activities Cash receipts from customers $155,940 Cash payments to suppliers (72,008) Cash payments for salaries (19,970) Cash payments for rent (4,990) Cash payments for insurance (2,596) Cash payments for utilities (1,980) Cash payments for interest (2,400) Net cash provided by operating activities $ 51,996 ©McGraw-Hill Companies, 2008 Solutions Manual, Chapter 12 657 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com SERIAL PROBLEM — SP 12 Serial Problem — SP 12, Success Systems (45 minutes) SUCCESS SYSTEMS Statement of Cash Flows (Indirect) For Quarter Ended March 31, 2008 Cash flows from operating activities Net income $ 24,336 Adjustments to reconcile net income to net cash provided by operating activities Increase in accounts receivable ($24,400 - $5,800) (18,600) Increase in inventory ($680 - $0) (680) Increase in computer supplies ($1,950 - $775) (1,175) Decrease in prepaid insurance ($1,800 - $1,200) 600 Decrease in accounts payable ($2,100 - $0) (2,100) Increase in wages payable ($1,050 - $600) 450 Decrease in unearned computer service revenue (2,500) Depreciation expense–Office Equipment 625 Depreciation expense–Computer Equipment 1,250 Net cash provided by operating activities $ 2,206 Cash flows from investing activities Net cash used in investing activities Cash flows from financing activities Cash received from stock issuance 10,000 Cash paid for dividends (5,200) Net cash provided by financing activities Net increase in cash Cash balance at December 31, 2007 Cash balance at March 31, 2008 4,800 $ 7,006 80,260 $87,266 ©McGraw-Hill Companies, 2008 658 Financial Accounting, 4th Edition To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Reporting in Action — BTN 12-1 Best Buy uses the indirect method of reporting operating cash flows We know this because the operating activity section of the cash flow statement starts with net income, and makes adjustments for items such as depreciation and changes in current assets and liabilities In all three years, Best Buy’s cash flows from operating activities exceeded the amount of cash dividends paid, as can be seen from the table below: ($ millions) 2005 Cash provided by operating activities $1,841 Cash dividends paid (137) 2004 $1,369 (130) 2003 $778 (0) In 2005, the largest item in reconciling the difference between net income and cash flow from operations was the depreciation of $459 million In 2004, the largest item in reconciling the difference between net income and cash flow from operations was the increase in inventories of $507 million In 2003, the largest item in reconciling the difference between net income and cash flow from operations was the depreciation of $310 In 2005, the largest cash inflow of cash from investing activities was $7,118 million from the sale of available-for-sale securities The largest cash outflow from investing activities was the purchase of available-forsale securities in the amount of $7,789 million In 2005, the largest cash inflow of cash from financing activities was $256 million from the issuance of common stock under employee stock option plans and the exercise of stock options The largest cash outflow from financing activities was $371 million for payments toward longterm debt In 2004, the largest cash inflow from investing activities was $2,175 million from the sale of available-for-sale securities The largest cash outflow from investing activities was $2,989 million from the purchase of available-for-sale securities In 2004, the largest cash inflow from financing activities was $114 million from the issuance of common stock under employee stock option plans and the exercise of stock options The largest cash outflow from financing activities was $130 million in dividends paid Answer depends on the financial statement information obtained ©McGraw-Hill Companies, 2008 Solutions Manual, Chapter 12 659 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Comparative Analysis — BTN 12-2 Best Buy’s cash flow on total assets ratio ($ millions) Current Year = Operating cash flows/Average total assets = $1,841 / [($10,294 + $8,652)/2] = $1,841 / $9,473 = 19.4% Prior Year = Operating cash flows/Average total assets = $1,369 / [($8,652 + $7,694)/2] = $1,369 / $8,173 = 16.8% Circuit City’s cash flow on total assets ratio ($ millions) Current Year = Operating cash flows/Average total assets = $456 / [($3,789 + $3,731)/2] = $456 / $3,760 = 12.1% Prior Year = Operating cash flows/Average total assets = $(126) / ($3,731 + $3,841)/2] = $(126) / $3,786 = (3.3)% The cash flow on total assets ratio reflects the return on average assets by using actual operating cash flows instead of net income This return calculation is not affected by the accounting constraints of recognition and measurement of revenues and expenses Instead, it is based solely on operating cash flows (which has its own strengths and weaknesses) Best Buy appears to be more successful at earning a cash return on its assets Specifically, Best Buy’s cash flow on total assets ratios for the past years (19.4% and 16.8%) are stronger than Circuit City’s (12.1% and (3.3)%) Many business decision makers (such as analysts) feel that the cash flow on total assets ratio is one indicator of earnings quality in that it is a measure of the ability of the company to realize its net income in the form of cash for the period under analysis ©McGraw-Hill Companies, 2008 660 Financial Accounting, 4th Edition To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Ethics Challenge — BTN 12-3 The business actions available include a Encourage early collection of receivables to reduce the accounts receivable balance b Defer payments to vendors due as of year-end to increase the accounts payable balance c Defer any other payments of operating expenses due near the yearend to improve the level of cash flow from operations Many other business actions are possible that would accelerate cash receipts and/or delay cash payments As a business owner, Lisa certainly can exercise discretion over business actions However, the underlying economic realities should support any proposed actions It is not ethical to pursue actions that purposely mislead users of financial statements In addition, Lisa’s actions may be transparent to the banker when s/he reviews the financial records of the business If so, her reputation may suffer in the eyes of her banker and she may jeopardize her ability to obtain bank financing in the future or increase the cost of that financing ©McGraw-Hill Companies, 2008 Solutions Manual, Chapter 12 661 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Communicating in Practice — BTN 12-4 Here is a sample of what the body of the memorandum might include: TO: FROM: SUBJECT: DATE: Jessica Willard (Your Name) Statement of Cash Flows _ I am pleased to hear your business is more profitable this year than last However, I have been thinking about what you said regarding the statement of cash flows and have some thoughts as to why you found it confusing The statement of cash flows (operating section) can be prepared using either of two methods—the direct or the indirect method From what you describe, your statement is probably prepared using the indirect method This method shows a determination of net cash flows in the operating (first) section by listing the net income number and applying a series of accounting adjustments These adjustments often not make sense to those that not have an accounting or finance background I recommend that you request your accountant to provide you with a statement of cash flows that is prepared using the direct method This will identify exactly how much cash came in from operating activities like sales It will also identify exactly how much cash went out for operating expenses like merchandise, wages, interest, and taxes It will determine your net operating cash flow by directly subtracting the total of these operating outflows from the inflows You should find this format more understandable Note that good cash management is essential to business success and growth The statement of cash flows will provide you with a lot more information regarding your cash than a balance sheet can offer It will allow you to see exactly where your cash came from, where it went, and how much it changed It organizes these amounts into categories of operating, financing, and investing This organization of cash information will allow you to better project and plan for the future Please reconsider the value of the statement of cash flows for your business decisions If you wish to discuss this further, please call me ©McGraw-Hill Companies, 2008 662 Financial Accounting, 4th Edition To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Taking It to the Net — BTN 12-5 J Crew Group uses the indirect method to construct the consolidated statement of cash flows The largest reconciling item is noncash interest expense of $63,536,000 The following table shows the net income (net loss) and the cash flows from operations for J Crew from 2003 through 2005 Over the threeyear period J Crew has generated more positive cash flows from operations (relative to its net losses); indeed, the severity of its net losses has grown when operating cash flows has increased over the past two years ($ thousands) 2005 2004 2003 Net loss $(100,309) $(50,184) $(40,590) Cash flows from operations 58,763 18,236 31,786 The largest cash outflow for investing was $13,431,000 for capital expenditures The largest cash outflow for financing was $324,198,000 for repayment of long-term debt For supplementary cash flow information, J Crew reports cash flows related to income taxes refunded and interest paid Yes; for all three years J Crew shows dividends on redeemable preferred stock as a significant noncash financing activity For 2004 only, J Crew shows interest payable on senior debentures capitalized and added to the principal amount of the debt ©McGraw-Hill Companies, 2008 Solutions Manual, Chapter 12 663 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Teamwork in Action — BTN 12-6 Part a The reporting objective of the statement of cash flows is to provide information about important cash inflows and outflows for business decision makers It answers specific questions such as: How does a company obtain its cash? Where does a company spend its cash? What is the change in the cash balance? b The statement can be prepared using the direct method or the indirect method for reporting cash flows from operating activities Similarities Both methods report the same net cash flow from operating activities Both methods classify cash flows into operating, financing, and investing categories Both methods provide exactly the same information in the financing and investing categories Both identify the change in cash, beginning cash, and ending cash Both are acceptable methods for financial reporting Differences Cash flow from operating activities is determined differently The direct method determines all operating cash inflows and outflows, and then subtracts total operating outflows from inflows The indirect method starts with net income and applies a series of adjustments to reconcile this accrual basis number to a cash basis number The direct method requires an extra section reconciling net income to cash flows from operating activities The direct method is recommended by the FASB The indirect method is more widely used ©McGraw-Hill Companies, 2008 664 Financial Accounting, 4th Edition To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Teamwork in Action (Continued) c Steps to prepare the statement of cash flows: (i) Compute the net increase or decrease in cash using comparative balance sheet data This is the target number or the number the statement will explain and prove (ii) Compute net cash flow in operating activities using the direct or indirect method (iii) Compute net cash flows from investing activities (iv) Compute net cash flows from financing activities (v) Prove that the net cash flow from the three categories combined equals the net change in cash List the beginning and ending cash balances to prove this Also, identify and list noncash financing and investing activities in a separate schedule or note d Common analyses made from information in the statement of cash flows include assessing a company’s: Ability to generate future cash flows Ability to pay dividends Ability to meet obligations Ability to expand operations Ability to obtain financing Cash flow on total assets ratio Sources and uses of cash flows Part Adjusting Net Income to Cash Flow from Operating Activities Items to Add Items to Subtract a Noncash expenses Noncash revenues b Losses Gains c Decreases in current assets Increases in current assets d Increases in current liabilities Decreases in current liabilities ©McGraw-Hill Companies, 2008 Solutions Manual, Chapter 12 665 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Teamwork in Action (Concluded) Part a Cash receipts from customers = Sales - Increase in Accounts Receivable, or, + Decrease in Accounts Receivable Explanation: Sales reflects what is earned during the period If Accounts Receivable increases, that increase represents earnings not yet collected, so we subtract it If Accounts Receivable decreases, the entity collected that much more than the period’s sales, so we add it b Cash paid for merchandise requires a two-step computation (1) Purchases = Cost of goods sold + Increase in inventory, or, – Decrease in inventory (2) Cash paid for merchandise = Purchases + Decrease in Accounts Payable, or, – Increase in Accounts Payable Explanation for (1): If inventory increases, the entity bought more than was sold, so we add it If inventory decreases, the entity bought less than was sold, so we subtract it Explanation for (2): If Accounts Payable decreases, the entity paid for more than the period’s purchases, so we add it If Accounts Payable increases, the entity paid for less than the period’s purchases, so we subtract it c Cash paid for wages and operating expenses = Wages and other operating expenses [+ Increase in prepaid expenses, or, – Decrease in prepaid expenses] and [+ Decrease in accrued liabilities, or, – Increase in accrued liabilities] Explanation: If prepaid expenses increase, the entity paid for more than was incurred, so we add it If prepaid expenses decrease, the entity paid for less than was incurred, so we subtract it Also, if the accrued liabilities increase, the expense includes an amount not yet paid for, so we subtract it If the accrued liabilities decrease, the entity paid for more than the period’s expenses, so we add it d Cash paid for interest and taxes = Interest and tax expense + Decrease in related payable, or, – Increase in related payable Explanation: If the related payable decreases, the entity paid for more than was incurred, so we add it If the related payable increases, the entity paid for less than was incurred, so we subtract it ©McGraw-Hill Companies, 2008 666 Financial Accounting, 4th Edition To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com BusinessWeek Activity — BTN 12-7 Amazon.com’s financial statements are presented in this order: Cash flows statement Income statement Balance sheet Statement of stockholders’ deficit Most other companies place either the income statement or balance sheet first, and the cash flow statement is usually presented third, just before the statement of stockholders’ equity Amazon.com has had a history of net losses, but with positive cash inflows The article states that Amazon.com has two different kinds of businesses, in two different industries – retailing and information technology The retailing business operates on thin profit margins The information technology has big cash outflows at the start, but once Amazon has invested its cash in the technology, this part of the business generates a large amount of future cash flows According to the Business Week article, Jeff Bezos, the founder and chief executive of Amazon.com, believes that cash flow is more important than earnings He believes that earnings don’t always turn into cash flows Entrepreneurial Decision — BTN 12-8 Often small businesses must pay cash in advance for items such as rent, advertising, expansion of facilities, and wages before any revenues are collected in cash If the business does not carefully plan, it is possible that the business could be profitable, but not be able to operate because it has no cash to pay its creditors, or to pay for needed expansions As a closely held corporation, Ashtae can potentially raise cash financing for expansion by selling shares in the company or by borrowing the monies Ashtae is not a publicly traded company, so the potential to raise capital by selling stock is somewhat restricted Moreover, potential lenders will want to evaluate the future profitability, cash flows, and solvency of Ashtae before lending money ©McGraw-Hill Companies, 2008 Solutions Manual, Chapter 12 667 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Entrepreneurial Decision — BTN 12-9 Memorandum To: From: Subject: Date: Jenna and Matt Wilder Your name Performance evaluation of Mountain High Current Date I have completed my evaluation of your company, Mountain High My conclusion is that Mountain High is performing well This is in spite of its reported net loss and its negative net cash flow, which I explain in this memorandum First, with respect to the net loss, please note that it includes an $85,000 extraordinary loss Absent this extraordinary loss, Mountain High would report a $75,000 net income Using year-end total assets, Mountain High’s return on assets would be roughly 9.4% (computed as $75,000 divided by $800,000) This return is reasonable for a company in its second year of operations Second, with respect to its net cash outflow of $(5,000), please note that this is mainly due to Mountain High’s renovation and expansion activities This is reflected in its summarized statement of cash flows Specifically, its cash flows provided by operating activities are an impressive $295,000 Again, using year-end total assets of $800,000, Mountain High’s operating cash flow on total assets ratio is roughly 36.9% This return is especially good for a company’s second year of operations Consequently, my evaluation is positive Operating cash flows are very good and attention should be directed at maintaining or increasing these amounts Also, income from continuing operations is a reasonable $75,000 Still, given the high operating cash flows relative to income from continuing operations, special scrutiny should be directed at identifying and assessing differences between cash flow and accrual amounts for important individual operating activities ©McGraw-Hill Companies, 2008 668 Financial Accounting, 4th Edition To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Hitting the Road — BTN 12-10 The Motley Fool’s Website defines cash flow as earnings before interest, taxes, depreciation, and amortization (EBITDA) Some analysts tend to focus on this particular earnings definition (earnings before interest and taxes or EBIT) as it purportedly allows a focus on a company’s real operating situation For example, taxes can depend on laws and can fluctuate from year to year By using the earnings before interest and taxes, the ―noise‖ caused by such fluctuations are minimized Answer depends on the links visited and chosen for the report Global Decision — BTN 12-11 Dixons’ cash flow on total assets ratio (£ millions) follows: Current Year = Operating cash flows/Average total assets = £328 / [(£3,874 + £4,158)/2] = £328 / £4,016 = 8.2% Prior Year = Operating cash flows/Average total assets = £340 / [(£4,158+ £4,081)/2] = £340 / £4,119.5 = 8.3% Dixons’ ratio is approximately the same for the current (8.2%) and prior (8.3%) years These ratio values for Dixons are less than both Best Buy and Circuit City, except for Circuit City’s prior year ratio value ©McGraw-Hill Companies, 2008 Solutions Manual, Chapter 12 669 ... (8,000) Cash provided by (used for) operations $ (6,000) $ 88,000 $96,000 ©McGraw-Hill Companies, 2008 Solutions Manual, Chapter 12 629 To download more slides, ebook, solutions and test bank,... (16,000) Cash provided by financing activities $ 4,000 ©McGraw-Hill Companies, 2008 630 Financial Accounting, 4th Edition To download more slides, ebook, solutions and test bank, visit... (6,000) Net cash provided by operating activities $466,600 ©McGraw-Hill Companies, 2008 632 Financial Accounting, 4th Edition To download more slides, ebook, solutions and test bank, visit