ACCT 1201 Chapter Notes - Chapter 12: Deferral, Free Cash Flow, Accrual
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Problem 12-13A Prepare and Interpret a Statement of Cash Flows; Free Cash Flow [LO12-1, LO12-2, LO12-3]
| Mary Walker, president of Rusco Company, considers $38,000 to be the minimum cash balance for operating purposes. As can be seen from the following statements, only $33,000 in cash was available at the end of 2015. Since the company reported a large net income for the year, and also issued both bonds and common stock, the sharp decline in cash is puzzling to Ms. Walker. |
| Rusco Company Comparative Balance Sheet July 31, 2015 and 2014 | ||||
| 2015 | 2014 | |||
| Assets | ||||
| Current assets: | ||||
| Cash | $ | 33,000 | $ | 54,600 |
| Accounts Receivable | 221,600 | 233,400 | ||
| Inventory | 266,200 | 206,800 | ||
| Prepaid expenses | 19,600 | 36,600 | ||
| Total current assets | 540,400 | 531,400 | ||
| Long-term investments | 144,000 | 210,000 | ||
| Plant and equipment | 896,000 | 768,000 | ||
| Less accumulated depreciation | 219,000 | 195,400 | ||
| Net plant and equipment | 677,000 | 572,600 | ||
| Total assets | $ | 1,361,400 | $ | 1,314,000 |
| Liabilities and Stockholders' Equity | ||||
| Current liabilities: | ||||
| Accounts payable | $ | 191,200 | $ | 249,800 |
| Accrued liabilities | 9,800 | 18,600 | ||
| Income taxes payable | 56,400 | 48,000 | ||
| Total current liabilities | 257,400 | 316,400 | ||
| Bonds Payable | 254,000 | 0 | ||
| Total liabilities | 511,400 | 316,400 | ||
| Stockholdersâ equity: | ||||
| Common stock | 717,000 | 690,000 | ||
| Retained earnings | 133,000 | 307,600 | ||
| Total stockholders' equity | 850,000 | 997,600 | ||
| Total liabilities and stockholders' equity | $ | 1,361,400 | $ | 1,314,000 |
| Rusco Company Income Statement For the Year Ended July 31, 2015 | |||
| Sales | $ | 1,160,000 | |
| Cost of goods sold | 725,000 | ||
| Gross margin | 435,000 | ||
| Selling and administrative expenses | 310,300 | ||
| Net operating income | 124,700 | ||
| Nonoperating items: | |||
| Gain on sale of investments | $29,000 | ||
| Loss on sale of equipment | (9,600) | 19,400 | |
| Income before taxes | 144,100 | ||
| Income taxes | 43,140 | ||
| Net income | $ | 100,960 | |
| The following additional information is available for the year 2015. |
| a. | The company declared and paid a cash dividend. |
| b. | Equipment was sold during the year for $58,400. The equipment had originally cost $126,000 and had accumulated depreciation of $58,000. |
| c. | Long-term investments that had cost $66,000 were sold during the year for $95,000. |
| d. | The company did not retire any bonds payable or repurchase any of its common stock. |
| Required: | |
| 1. | Using the indirect method, compute the net cash provided by operating activities for 2015. (Negative amount should be indicated by a minus sign.) |
| 2. | Using the data from (1) above, and other data from the problem as needed, prepare a statement of cash flows for 2015. (List any deduction in cash and cash outflows as negative amounts.) |
| Rusco Company |
| Statement of Cash Flows - Indirect Method |
| For the year ended July 31,2015 |
|
| 3. | Compute free cash flow for 2015. (Negative amount should be indicated by a minus sign.) |
| Free cash flow |
| Comparative financial statement data for Carmono Company follow: |
| This Year | Last Year | |||
| Assets | ||||
| Cash | $ | 7.50 | $ | 14.00 |
| Accounts receivable | 50.00 | 43.00 | ||
| Inventory | 92.50 | 79.20 | ||
| Total current assets | 150.00 | 136.20 | ||
| Property, plant, and equipment | 231.00 | 194.00 | ||
| Less accumulated depreciation | 45.60 | 34.20 | ||
| Net property, plant, and equipment | 185.40 | 159.80 | ||
| Total assets | $ | 335.40 | $ | 296.00 |
| Liabilities and Stockholdersâ Equity | ||||
| Accounts payable | $ | 55.50 | $ | 46.00 |
| Common stock | 118.00 | 91.00 | ||
| Retained earnings | 161.90 | 159.00 | ||
| Total liabilities and stockholdersâ equity | $ | 335.40 | $ | 296.00 |
| For this year, the company reported net income as follows: |
| Sales | $ | 850.00 |
| Cost of goods sold | 510.00 | |
| Gross margin | 340.00 | |
| Selling and administrative expenses | 320.00 | |
| Net income | $ | 20.00 |
| This year Carmono declared and paid a cash dividend. There were no sales of property, plant, and equipment during this year. The company did not repurchase any of its own stock this year. Carmono CompanyStatement of Cash Flows - Indirect MethodFor This Year Ended December 31Operating activities:Net income$20.00Adjustments to convert net income to a cash basis:Depreciation$11.40Increase in accounts receivable(7.00)Increase in inventory(13.30)Increase in accounts payable9.500.60Net cash provided by operating activities20.60Investing activities:Increase in plant and equipment(37.00)Net cash used in investing activities(37.00)Financing activities:Increase in common stock27.00Cash dividends(17.10)Net cash provided by financing activities9.90Net decrease in cash(6.50)Beginning cash and cash equivalents14.00Ending cash and cash equivalents$7.50 |
| | ||
| 2. | Compute Carmonoâs free cash flow for this year. (Negative amount should be indicated by a minus sign. Round your intermediate calculations and final answer to 2 decimal places.) |
Free cash flow$
3.
| Changes in various accounts and gains and losses on the sale of assets during the year for Argon Company are given below: |
| Item | Amount | ||
| Accounts receivable | $ | 79,000 | decrease |
| Inventory | $ | 120,000 | increase |
| Prepaid expenses | $ | 3,500 | decrease |
| Accounts payable | $ | 41,000 | decrease |
| Accrued liabilities | $ | 9,600 | increase |
| Income taxes payable | $ | 15,700 | increase |
| Sale of equipment | $ | 8,100 | gain |
| Sale of long-term investments | $ | 12,200 | loss |
| Required: |
| For each item, indicate whether the dollar amount should be added to or deducted from net income under the indirect method when computing the net cash provided by operating activities for the year. |
|
4.
| Apex Company prepared the statement of cash flows for the current year that is shown below: |
| Apex Company Statement of Cash FlowsâIndirect Method | ||||
| Operating activities: | ||||
| Net income | $ | 41,500 | ||
| Adjustments to convert net income to cash basis: | ||||
| Depreciation | $ | 20,100 | ||
| Increase in accounts receivable | (61,500) | |||
| Increase in inventory | (25,100) | |||
| Decrease in prepaid expenses | 9,400 | |||
| Increase in accounts payable | 54,300 | |||
| Decrease in accrued liabilities | (10,100) | |||
| Increase in income taxes payable | 3,300 | (9,600) | ||
| Net cash provided by operating activities | 31,900 | |||
| Investing activities: | ||||
| Proceeds from the sale of equipment | 15,200 | |||
| Loan to Thomas Company | (41,900) | |||
| Additions to plant and equipment | (121,800) | |||
| Net cash used for investing activities | (148,500) | |||
| Financing activities: | ||||
| Increase in bonds payable | 88,800 | |||
| Increase in common stock | 38,700 | |||
| Cash dividends | (28,400) | |||
| Net cash provided by financing activities | 99,100 | |||
| Net decrease in cash | (17,500) | |||
| Beginning cash balance | 27,200 | |||
| Ending cash balance | $ | 9,700 | ||
| Required: |
| Compute Apex Companyâs free cash flow for the current year. (Negative amount should be indicated by a minus sign.) |
Free Cash Flow
5.
| For the just completed year, Hanna Company had net income of $95,000. Balances in the companyâs current asset and current liability accounts at the beginning and end of the year were as follows: |
| December 31 | ||||
| End of Year | Beginning of Year | |||
| Current assets: | ||||
| Cash | $ | 59,000 | $ | 80,000 |
| Accounts receivable | $ | 164,000 | $ | 184,000 |
| Inventory | $ | 448,000 | $ | 346,000 |
| Prepaid expenses | $ | 11,500 | $ | 15,000 |
| Current liabilities: | ||||
| Accounts payable | $ | 366,000 | $ | 392,000 |
| Accrued liabilities | $ | 8,000 | $ | 13,000 |
| Income taxes payable | $ | 32,000 | $ | 25,000 |
| The Accumulated Depreciation account had total credits of $42,000 during the year. Hanna Company did not record any gains or losses during the year. |
| Required: |
| Use the indirect method to determine the net cash provided by (or used in) operating activities for the year. (List any deduction in cash and cash outflows as negative amounts.) |
Can someone please provide the solutions. No explanation needed,just the answers so I can double check my work.
2. Firms with tangiblelong-term assets and less predictable cash flows, such as automanufacturers and steel companies, whose sales vary with changes ineconomic conditions, tend to use
a. | a more nearly equal mix of long-term debt and shareholdersâequity financing. |
b. | a greater amount of long-term debt [80%] than shareholdersâequity financing [20%]. |
c. | a smaller amount of long-term debt [20%] than shareholdersâequity financing [80%]. |
d. | a greater amount of long-term debt [80%] than assets [20%]. |
e. | a greater amount of shareholdersâ equity [80%] than assets[20%]. |
3. During Year 3,Carrington Company made the following expenditures relating toplant machinery and equipment:
· | Continuing, frequent, and low cost repairs | $46,000 |
· | Special long-term protection devices were attached to tenmachines | 11,000 |
· | A broken gear on a machine was replaced | 5,000 |
How much should be charged to repairs and maintenance in Year3?
a. | $46,000 |
b. | $51,000 |
c. | $57,000 |
d. | $41,000 |
e. | none of the above |
4. Which of the followingis/are not capitalized as an intangible asset?
a. | costs of an internally developed patent |
b. | legal costs to defend a patent successfully |
c. | goodwill acquired when a company purchases another company |
d. | costs to purchase a patent |
e. | none of the above |
5. Repairs and maintenancedo not include
a. | the costs of restoring an asset's service potential afterbreakdowns. |
b. | expenditures that increase the asset's life. |
c. | routine costs such as for cleaning and adjusting. |
d. | major tune-ups including labor and parts. |
e. | All of the above are not considered to be repairs ormaintenance. |
12. Sigma Company suffers a loss to itsbuilding in a fire and spends $100,000 on repairs and improvements.It judges that $80,000 of the expenditure replaces long-livedassets lost in the fire, and $20,000 represents improvements to thebuilding. Which of the following is the single journal entry thatSigma Company will make?
a. | Building . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . 100,000 Cash . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . . . . .. 100,000 |
b. | Loss from Fire . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . 100,000 Cash . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . . . .. 100,000 |
c. | Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . 100,000 Building . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . . . . .. 20,000 Loss from Fire . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . . . . . . .. 80,000 |
d. | Building . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . 20,000 Loss from Fire . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . 80,000 Cash . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . . . .. 100,000 |
e. | Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . 100,000 Loss from Fire . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . . . . . . .. 100,000 |
16. Firms treat expenditures as assetswhen they:
a. | have acquired rights to the future use of a resource as a resultof a past transaction or event. |
b. | can reliably measure the cost of the expected benefits at thetime of initial recognition. |
c. | can exercise the entityâs right to, or control of, thebenefit. |
d. | can obtain the future service potential and control othersâaccess to it. |
e. | all of the above |
Clarion Realty
Clarion Realty has decided to construct its own office building.The construction will be partially financed through a constructionloan and any remainder will be financed from internally generatedfunds. The internal accountants have collected the followinginformation concerning the construction.
Average Balance | Construction | Other | |
Year | Construction Account | Debt @ 6% | Debt @ 10% |
1 | $2,000,000 | $1,000,000 | $500,000 |
2 | $4,000,000 | $1,000,000 | $250,000 |
3 | $3,000,000 | $800,000 | $200,000 |
22. The amount, if any, of capitalizedinterest cost for Year 1 is
a. | $0 |
b. | $50,000 |
c. | $60,000 |
d. | $110,000 |
e. | $170,000 |
23. The amount, if any, of capitalizedinterest cost for Year 2 is
a. | $0 |
b. | $50,000 |
c. | $60,000 |
d. | $180,000 |
e. | $230,000 |
33. When a firm constructs its ownbuildings or equipment:
a. | it recognizes the labor, material, and overhead costs incurredas an asset. |
b. | U.S. GAAP and IFRS require firms to include, or capitalize,interest costs during construction in the cost of aself-constructed asset. |
c. | it recognizes the labor, material, and overhead costs incurredas a period expense. |
d. | U.S. GAAP and IFRS require firms to expense interest costsincurred during construction of a self-constructed asset. |
e. | both choices a and b are correct. |