DQ 1 WK 4 - Expert Answers

DQ 1 WK 4
Direct vs Indirect
What are the differences between the direct and indirect method of presenting a statement of cash flows? Which method of presenting a statement of cash flows is the best? Why? Which method appears to be most preferred?
DQ 2 WK  4
 
Cash Flow Statement
What does a statement of cash flows tell you about a company? Why is the statement of cash flows important? Can a company have profits but no cash? Why?
Question 1                 
The major classifications of activities reported in the statement of cash flows are operating, investing, and financing. Classify each of the transactions listed below as:                       
1                      Operating activity-add to net income.
2                      Operating activity-deduct from net income.
3                      Investing activity.
4                      Financing activity.
5                      Reported as significant noncash activity
                       
The transactions are as follows.                    
                       
(a)                   Issuance of common stock.
(b)                   Purchase of land and building.
(c)                   Redemption of bonds
(d)                   Sale of equipment.
(e)                   Depreciation of machinery.
(f)                    Amortization of patent.
(g)                   Issuance of bonds for plant assets.
(h)                   Payment of cash dividends.
(i)                    Exchange of furniture for office equipment.
(j)                    Purchase of treasury stock.
(k)                   Loss on sale of equipment.
(l)                    Increase in accounts receivable during the year.
(m)                  Decrease in accounts payable during the year.
                       
Question 2                                                                                                                 
A comparative balance sheet for Shabbona Corporation is presented below.                                                                                                                     
                        31-Dec                                               
Assets             2014                2013                                       
Cash                $ 73,000                                  $ 22,000                                                         
Accounts receivable               $82,000                                   $66,000                                                          
Inventory                    $180,000                                 $189,000                                                        
Land                $71,000                                   $110,000                                                        
Equipment                  $260,000                                 $200,000                                                        
Accumulated Depreciation-Equipment                     (69,000            )                       (42,000            )                                              
   Total            $597,000                                 $545,000                                                        
Liabilities and Stockholders' Equity                                                                                                             
Accounts payable                   $ 34,000                                  $ 47,000                                                         
Bonds payable                        $150,000                                 $200,000                                                        
Common stock ($1 par)                     $214,000                                 $164,000                                                        
Retained earnings                   $199,000                                 $134,000                                                        
   Total            $597,000                                 $545,000                                                        
                                                                                                                       
Additional information:                                                                                                                    
1                      Net income for 2014 was $125,000.                                                                                     
2                      Cash dividends of $60,000 were declared and paid.                                                                                    
3                      Bonds payable amounting to $50,000 were retired through issuance of common stock.                                                                                              
                                                                                                                       
Prepare a statement of cash flows for 2014 for Shabbona Corporation. (Show amounts that decrease cash flow with either a - sign e.g. -15,000 or in parenthesis e.g. (15,000).) 
Determine Shabbona Corporation’s current cash debt coverage ratio, cash debt coverage ratio, and free cash flow.(Round ratios to 2 decimal places., e.g. 0.67.)
 
Question3                                                                                                                                                     
Each of the following items must be considered in preparing a statement of cash flows (indirect method) for Turbulent Indigo Inc. for the year ended December 31, 2014. State where each item is to be shown in the statement of cash flows, if at all. 
(a)       Plant assets that had cost $20,000 6 years before and were being depreciated on a straight-line basis over 10 years with no estimated scrap value were sold for $5,300.
(b)       During the year, 10,000 shares of common stock with a stated value of $10 a share were issued for $43 a share.
(c)       Uncollectible accounts receivable in the amount of $27,000 were written off against Allowance for Doubtful Accounts.
(d)       The company sustained a net loss for the year of $50,000. Depreciation amounted to $22,000, and a gain of $9,000 was realized on the sale of land for $39,000 cash.                                                                                               
(e)       A 3-month U.S. Treasury bill was purchased for $100,000. The company uses a cash and cash-equivalent basis for its cash flow statement.
 (f)       Patent amortization for the year was $20,000.                                                                     
(g)       The company exchanged common stock for a 70% interest in Tabasco Co. for $900,000.
 (h)      During the year, treasury stock costing $47,000 was purchased.                                                                            
Question 4                                                                 
Condensed financial data of Pat Metheny Company for 2014 and 2013 are presented below.                                                                       
PAT METHENY COMPANY
COMPARATIVE BALANCE SHEET
AS OF DECEMBER 31, 2014 AND 2013
                        2014                2013
Cash                $1,800                                     $1,150            
Receivables                1,750                           1,300  
Inventory                    1,600                           1,900  
Plant assets                 1,900                           1,700  
Accumulated depreciation                 (1,200  )                       (1,170  )
Long-term investments (held-to-maturity)               1,300                           1,420  
                        $7,150                                     $6,300            
                                                                       
Accounts payable                   $1,200                                     $900   
Accrued liabilities                  200                              250     
Bonds payable                        1,400                           1,550  
Capital stock               1,900                           1,700  
Retained earnings                   2,450                           1,900  
                        $7,150                                     $6,300            
                                                                       
PAT METHENY COMPANY                                               
INCOME STATEMENT                                           
FOR THE YEAR ENDED DECEMBER 31, 2014                                        
Sales revenue              $6,900                                                
Cost of goods sold                  4,700                                      
Gross margin              2,200                                      
Selling and administrative expenses             930                                         
Income from operations                     1,270                                      
Other revenues and gains                                                                  
   Gain on sale of investments                        80                                           
Income before tax                   1,350                                      
Income tax expense                540                                         
Net income                 $810                                       
Cash dividends                       260                                         
Income retained in business               $550                                       
                                                                       
Additional information:                                                                    
                                                                       
During the year, $70 of common stock was issued in exchange for plant assets. No plant assets were sold in 2014.                                                                   
                                                                       
Prepare a statement of cash flows using the indirect method. (Show amounts that decrease cash flow with either a - sign e.g. -15,000 or in parenthesis e.g. (15,000).)                                                            
Question 5                                                                 
Condensed financial data of Pat Metheny Company for 2014 and 2013 are presented below.                                                                       
PAT METHENY COMPANY
COMPARATIVE BALANCE SHEET
AS OF DECEMBER 31, 2014 AND 2013
                        2014                2013
Cash                $1,800                                      $1,150           
Receivables                1,750                           $1,300           
Inventory                    1,600                           $1,900           
Plant assets                 1,900                           $1,700           
Accumulated depreciation                 (1,200  )                       (1,170             )
Long-term investments (held-to-maturity)               1,300                           $1,420           
                        $7,150                                      $6,300           
                                                                       
Accounts payable                   $1,200                                      $900  
Accrued liabilities                  200                              $250  
Bonds payable                        1,400                           $1,550           
Capital stock               1,900                           $1,700           
Retained earnings                   2,450                           $1,900           
                        $7,150                                      $6,300           
                                                                       
PAT METHENY COMPANY                                               
INCOME STATEMENT                                           
FOR THE YEAR ENDED DECEMBER 31, 2014                                        
Sales revenue              $6,900                                                
Cost of goods sold                  4,700                                      
Gross margin              2,200                                      
Selling and administrative expenses             930                                         
Income from operations                     1,270                                      
Other revenues and gains                                                                  
   Gain on sale of investments                        80                                           
Income before tax                   1,350                                      
Income tax expense                540                                         
Net income                 $810                                       
Cash dividends                       260                                         
Income retained in business               $550                                       
Additional information:                                                                    
During the year, $70 of common stock was issued in exchange for plant assets. No plant assets were sold in 2014
Prepare a statement of cash flows using the direct method. (Show amounts that decrease cash flow with either a - sign e.g. -25,000 or in parenthesis e.g. (25,000).)       
Powered by