Solution manual financial accounting 8th by harrison CH10

To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Chapter 12 The Statement of Cash Flows Short Exercises (10 min.) S 12-1 The statement of cash flows helps investors and creditors: a Predict future cash flows by reporting past cash receipts and payments, which are reasonably good predictors of future cash receipts and payments b Evaluate management decisions by reporting on how managers got cash and how they used cash to run the business Chapter 12 The Statement of Cash Flows 945 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com (10-15 min.) DATE: _ TO: Managers of U.S Rondeau Inc FROM: Student Name S 12-2 SUBJECT: Purposes of the statement of cash flows The statement of cash flows is designed to help predict the future cash flows of a business The statement of cash flows measures past cash flows, which are a reasonably good predictor of future cash flows Net income is an important measure of management performance, but it takes cash to pay the bills Also, a manager’s performance should be evaluated on how well he or she uses cash This information is given in the statement of cash flows In evaluating the ability to repay a loan, a creditor examines the statement of cash flows to learn how the borrower has gained and spent cash As U.S Rondeau’s situation indicates, income may increase while cash decreases Therefore, the statement of cash flows should be used in conjunction with the income statement and the balance sheet in evaluating a company Student responses may vary 946 Financial Accounting 8/e Solutions Manual To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com S 12-3 Three things that could cause operating cash flows to be positive (under the indirect method) are: Increase in net income Decreases rather than increases in current assets other than cash Increases rather than decreases in current liabilities Depreciation and amortization Students need to identify items Chapter 12 The Statement of Cash Flows 947 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com (15-30 min.) DATE: _ TO: Managers of Tranquility Inns FROM: Student Name S 12-4 SUBJECT: Assessment of 2010 and Outlook for the Future 2010 was not a good year Most of the increase in net income resulted from the extraordinary gain on the insurance proceeds from fire damage to a building, which means that normal operations were not very profitable This is confirmed by the increase in receivables, which hints that collections are lagging The cash-flow data paint a similar picture Operating activities used cash, which is bad news Over the long run, operations should provide the bulk of the cash if the business expects to succeed 948 Financial Accounting 8/e Solutions Manual To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com (continued) S 12-4 During 2010, the insurance recovery helped investing activities produce a net cash inflow Ordinarily, investing activities should produce net cash outflows as the business invests in new assets Growth is usually indicated by investments in new assets, but during 2010 net cash flows from investing activities were positive, which means that net investments were negative Although the net cash flow provided by investing activities may be temporary, it does not reflect especially well on the company It means that, in part at least, the company is maintaining its cash position by liquidating fixed assets This is a bad sign Financing activities provided a net cash inflow, which is normal However, coupled with the net cash used for operations and the net cash provided by investing activities, the additional debt created in 2010 may be hard to pay back Unless next year turns out to be much better than 2010, the outlook for the company is not bright Student responses may vary The key conclusion is that 2010 was not a good year, and the outlook is not bright Chapter 12 The Statement of Cash Flows 949 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com (5-10 min.) Cash flows from operating activities: Net income……………………………………………… Adjustments to reconcile net income to net cash provided by operating activities: Depreciation………………………………………… Loss on sale of land………………………………… Decrease in accounts receivable, inventory, and prepaid expenses ($58,000 − $55,000)… Increase in current liabilities ($32,000 − $20,000) Net cash provided by operating activities:… 950 Financial Accounting 8/e Solutions Manual S 12-5 $12,000 8,000 2,000 3,000 12,000 $37,000 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com (10 min.) O+ a Increase in accounts payable I b Purchase of equipment O+ c Decrease in prepaid expense N d Collection of cash from customers O+ e Net income N f Retained earnings F g Payment of dividends S 12-6 O− h Decrease in accrued liabilities F i Issuance of common stock O− j Gain on sale of building O+ k Loss on sale of land O+ l Depreciation expense O− m Increase in inventory O+ n Decrease in accounts receivable (10 min.) S 12-7 Ethan Corporation Statement of Cash Flows (partial) Year ended June 30, 2010 Cash flows from operating activities: Net income……………………………………… Adjustments to reconcile net income to net cash provided by operating activities: $ 68,000* $ 11,000 Depreciation………………………………… Decrease in current assets other than 35,000 cash………………………………………… Increase in current liabilities……………… Net cash provided by operating activities… Chapter 12 7,000 53,000 $ 121,000 The Statement of Cash Flows 951 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com _ *$228,000 − $116,000 − $33,000 − $11,000 = $68,000 952 Financial Accounting 8/e Solutions Manual To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com (15 min.) S 12-8 Ethan Corporation Statement of Cash Flows Year ended June 30, 2010 Cash flows from operating activities: Net income……………………………………… Adjustments to reconcile net income to net cash provided by operating activities: Depreciation………………………………… $ 11,000 Increase in current assets other than cash………………………………………… 35,000 Decrease in current liabilities……………… 7,000 Net cash provided by operating activities… $ 68,000* 53,000 121,000 Cash flows from investing activities: Purchase of equipment………………………… $(43,000) Proceeds from sale of land…………………… 29,000 Net cash provided by investing activities… (14,000) Cash flows from financing activities: Proceeds from issuance of common stock… $ 26,000 Payment of note payable……………………… (32,000) Payment of dividends………………………… (5,600) Purchase of treasury stock…………………… (6,000) Net cash used for financing activities……… Net increase in cash……………………………… (17,600) $ 89,400 _ *$228,000 − $116,000 − $33,000 − $11,000 = $68,000 Chapter 12 The Statement of Cash Flows 953 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com S 12-9 (10 min) a Acquisitions of plant assets = $71,000, as follows: Plant Assets, net Beg bal + Acquisitions − Depreciation − $188,000 + Book value of = assets sold X − $ 30,000 − X = $229,000 − $188,000 + $30,000 X = $ 71,000 $0 Plant Assets, net Beg bal 188,000 Acquisitions 71,000 Depreciation End bal 229,000 End bal = $229,000 30,000 b Proceeds from the sale of long-term investments = $25,000, as follows: Long-term investments Beg bal + Purchases − Book value of investments sold = End bal $79,000 + − X = $54,000 X = $79,000 − $54,000 X = $25,000 With no gain or loss, proceeds from the sale must be the same as the book value of the investments sold, $25,000 Beg bal End bal 954 Long-Term Investments 79,000 Book value of investments sold 25,000 54,000 Financial Accounting 8/e Solutions Manual To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com (continued) P 12-77B Req Franny Franklin Design Studio, Inc Statement of Cash Flows Year Ended June 30, 2010 Cash flows from operating activities: Receipts: Collections from customers……………… $ 272,300 Interest received…………………………… 1,400 Total cash receipts……………………… $ 273,700 Payments: To suppliers………………………………… $(130,900) To employees………………………………… (40,000) For income tax……………………………… (12,500) For interest…………………………………… (5,200) Total cash payments…………………… (188,600) Net cash provided by operating activities… $ 85,100 1030 Financial Accounting 8/e Solutions Manual To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Decision Cases (45-60 min.) Decision Case Req (indirect method for operating activities) T-Bar-M Camp, Inc Statement of Cash Flows Year Ended December 31, 2011 Cash flows from operating activities: (Thousands) Net income………………………………………………… $ 97 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation……………………………………….… $ 46 Amortization of patents…………………………… 11 Increase in accounts receivable ($72 − $61)……… (11) Increase in inventories ($194 − $181)………….… (13) Increase in accounts payable ($63 − $56)……… Decrease in accrued liabilities ($17 − $12)……… (5) 35 Net cash provided by operating activities…………… 132 Cash flows from investing activities: Purchase of property, plant, and equipment ($369 − $259)………………………….… $(110) Purchase of long-term investments ($31 − $0)……… (31) Net cash used for investing activities………….… (141) Cash flows from financing activities: Issuance of common stock ($149 − $61)…………… $ 88 Payment of cash dividends ($156 + $97 − $213)…… (40) Payment of long-term notes payable ($264 − $179) (85) Net cash used for financing activities……… …… Net (decrease) in cash………………………….…………… Cash balance, December 31, 2010………………………… Cash balance, December 31, 2011………………………… (37) $ (46) 63 $ 17 Chapter 12 The Statement of Cash Flows 1031 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com (continued) Decision Case Req The cash balance at the end of 2011 is low because: The camp paid $110,000 to buy new property, plant, and equipment The camp paid off $85,000 of notes payable Req Year 2011 was a good year Net income was $97,000, and operations were the largest source of cash Also, the company increased its property, plant, and equipment by $110,000 and paid off $85,000 of debt On this basis, business appears to have been successful 1032 Financial Accounting 8/e Solutions Manual To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com (15-25 min.) Decision Case Four-Star Catering looks like the better investment because: Operations provide far more cash for Four-Star than for Applied Technology Operations should be the main source of cash for a healthy company Four-Star is investing more in long-term plant assets than Applied is Four-Star is laying a more solid foundation in revenue-producing assets than Applied is Applied Technology’s main source of cash is the sale of plant assets This trend cannot continue for long without hurting the company’s ability to produce revenue Four-Star is raising more cash by selling stock than Applied is This gives Four-Star more cash to invest in research and development of new products and other innovations to enhance the company’s competitiveness Applied, on the other hand, is paying off debt That is not necessarily bad for Applied, but Four-Star appears to be a step ahead in terms of financing its operations with owners’ equity and investing the cash in income-producing assets Chapter 12 The Statement of Cash Flows 1033 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Ethical Issue Req Cash flows from operating Without With activities: Reclassification Reclassification Net income…………… $ 37,000 $37,000 Increase in accounts receivable…………… (80,000) — Net cash (used for) provided by operating activities… $(43,000) $37,000 Columbia looks better with the reclassification because net cash flow from operations is positive Req The issue is whether or not it is ethical to reclassify accounts receivable from current assets to long-term assets Req and Req The stakeholders are Columbia, its officers, directors and employees, as well as their present and future creditors Economic analysis: The plan to reclassify accounts receivable would have an immediate positive impact on Columbia and its employees because it might enable Columbia to obtain the loan it desperately needs However, this might be to the detriment of present and future creditors, because if Columbia can’t 1034 Financial Accounting 8/e Solutions Manual To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com collect the receivables, it may not be able to pay off its loans to creditors (continued) Ethical case Legal analysis: To reclassify receivables when, in fact, they are not truly collectible, even in the long run, might leave the company open later to a lawsuit for damages suffered by creditors who loan Columbia money based on false information Ethical analysis: To reclassify receivables when, in fact, they are not truly collectible in the long run, deprives the banks of accurate information they need to make sound financial decisions Reclassification would be unethical if Columbia expects to collect within the current period In that case, the reclassification would appear to be designed to create a false picture of cash flow from operations It is not truthful and not ethical In the long run, no one benefits from this short-sighted decision Req The receivables should be classified in the way that best describes their collectability In reality, most bank loan officers who know financial accounting (and most do) will closely Chapter 12 The Statement of Cash Flows 1035 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com examine these receivables classify them as long-term for their own lender analysis Req The reclassification would be ethical if Columbia expects to collect the receivables beyond the current operating cycle, or one year if longer 1036 Financial Accounting 8/e Solutions Manual To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Focus on Financials: Amazon.com, Inc (40-50 min.) Req Indirect method The statement of cash flows begins with net income Also, Amazon.com, Inc does not report collections from customers, payments to suppliers, and so on, which are reported under the direct method Req (Amounts in millions) a This problem requires an analysis of the activity in gross accounts receivable The account caption is listed as Accounts receivable, net and other, meaning that several items (debit and credit) were netted against one another in order to get the balances listed on the balance sheet It is necessary first to isolate just the accounts receivable portion of these amounts In Footnote 1, under Accounts receivable, net and other, it states: ―Included in Accounts receivable, net, and other on our consolidated balance sheets are amounts primarily related to vendor receivables and customer receivables At December 31, 2008 and 2007, vendor receivables, net, were $400 million and $280 million, and customer receivables, net, were $311 million and $296 million.‖ Immediately below that, under Allowance for doubtful accounts, we find the following: Chapter 12 The Statement of Cash Flows 1037 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com ―We estimate losses on receivables based on known troubled accounts, if any, and historical experience of losses incurred The allowance for doubtful customer and vendor receivables was $81 million and $64 million at December 31, 2008 and 2007.‖ In order to calculate gross accounts receivable from vendors and customers at the beginning and end of the year, it is necessary to add those two amounts to both beginning and ending balances of the allowance for doubtful accounts as shown in the T-accounts below Then, add sales revenue to the beginning gross balance ($19,166 from the income statement) , subtract write-offs and subtract the ending balance ($657) The write off figure is calculated by taking the beginning balance of the allowance for doubtful accounts ($64), adding assumed expense (.5% x 19,166) and subtracting the ending balance ($81) Gross Accounts Receivable, Vendors and Customers Beg.Bal ($400+311+$64) $775 Sales (income 19,166 Write-offs (below) 79 statement) Collections ($775+19,166-79-657) 19,205 End.Bal.($280+296+$81) $657 1038 Financial Accounting 8/e Solutions Manual To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Allowance for Doubtful Accounts Beg Bal $64 Write-offs Doubtful accounts expense: ($64 + 96 - 81) 79 ($19,166 x 005) 96 End Bal $81 b Using the format provided in Exhibit 12-15: (Amounts in millions) Payments for Cost of Increase in inventory = sales + Inventory − $14,296 = $14,896 + ($1,399 − $1,200) Chapter 12 Increase in Accounts Payable − ($3,594 - $2,795) The Statement of Cash Flows 1039 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com (continued) Focus on Financials: Amazon.com, Inc Req (Amounts in millions) From Note of the Footnotes to Consolidated Financial Statements: Property, Plant, and Equipment, Net Bal., Dec 31, 2007 543 ($1,023 – 480) Capital spending 333 (investing section, Depreciation (Note 3) statement of cash flows) Acquisitions of other Companies (diff) 289 Bal., Dec 31, 2008 854 ($1,409 – 555) 311 Req In 2008, for Amazon.com, Inc., Net income increased from 2007 by $169 million ($645 $476) Total assets increased from 2007 by $1,729 million ($8,314 $6,485) Stockholders’ equity more than doubled from 2007 ($2,672 $1,197) Cash flow from operations was almost times net income ($1,697 - $645) Overall, 2008 was a very good year for Amazon.com, Inc 1040 Financial Accounting 8/e Solutions Manual To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Focus on Analysis: Foot Locker, Inc (20-30 min.) (All amounts are in thousands) Req The main source of cash is sales of short-term investments ($1,620) This indicates that Foot Locker, Inc.’s basic operations are not generating enough cash to finance current operations Fortunately, the company owned trading securities, which they sold in order to raise enough cash to operate during 2007 The main use of cash is purchase of short-term investments ($1,378) This too indicates that Foot Locker’s core operations are not generating enough cash However, they still have enough to cash from operations purchase short-term investments which will be available next period if they need to be sold This strategy will work as long as there is excess cash to invest in these types of securities However, over the longrun, if operations start to use cash rather than generate it, the supply of these securities will be depleted, placing the company in a position of having to borrow short-term funds for operating purposes Chapter 12 The Statement of Cash Flows 1041 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com (continued) Focus on Analysis: Foot Locker, Inc Req Why net cash provided by operations differs from net income: Non-cash impairment charges and store closing costs (+$124) These were expenses that did not use cash, so they were added back to net income Depreciation and amortization (+$166) These expenses decreased net income but didn’t decrease cash Therefore, cash flow from operations always exceeds net income insofar as depreciation and amortization are concerned Decrease in deferred income taxes payable (-$129), meaning that the company had to pay these taxes in the current year in addition to its normal income tax expense 1042 Financial Accounting 8/e Solutions Manual To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com (continued) Focus on Analysis: Foot Locker, Inc Req Foot Locker, Inc bought more fixed assets ($148 million) than it sold (none listed) during fiscal 2007 The amount purchased comes from the investing section of the Consolidated Statements of Cash Flows for 2007 Req Cash returned to stockholders during fiscal 2007 (in millions): Dividends……………………………………………… $77 Purchases of treasury stock……………………… 50 Total…………………………………………………… $127 Although profits were falling, management apparently felt compelled to continue to pay a cash dividend to shareholders Established companies often feel this pressure during difficult economic times, in order to bolster confidence on the part of shareholders in management’s ability to lead In addition, management apparently felt that the purchase of the company’s own stock at a low price was a good use of cash As explained in Chapter 9, repurchasing treasury stock serves to reduce the number of outstanding shares used in the earnings per share (EPS) calculation, which in turn is a factor in helping increase the price of the company’s common stock Chapter 12 The Statement of Cash Flows 1043 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Group Projects (2-3 hours) Student responses will vary on this assignment 1044 Financial Accounting 8/e Solutions Manual ... assets Most healthy financially - Case B Mid-range - Case C Least healthy financially - Case A 966 Financial Accounting 8/e Solutions Manual To download more slides, ebook, solutions and test... $20,000) Net cash provided by operating activities:… 950 Financial Accounting 8/e Solutions Manual S 12-5 $12,000 8,000 2,000 3,000 12,000 $37,000 To download more slides, ebook, solutions and test... activities: Acquisition of plant assets by issuing note payable 970 Financial Accounting 8/e Solutions Manual $ 43,000 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com