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ACC 110 (74)


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ACC 110
Marla Spergel

CHAPTER 5 Cash Flow, Profitability, and the Cash Flow Statement EXERCISES E5-1. a. Payables deferral period (goods received - suppliers paid) 45 days b. Inventory self-financing period (supplier paid - cash collected) Average time fabric held in inventory (5 x 30) 150 days Average time from first appointment to delivery 35 days Average time from delivery to customer payment 15 days Less: Payables deferral period (from part a) (45 days) 155 days c. Inventory conversion period (goods received inventory sold): Average time fabric held in inventory 150 days Average time from first appointment to delivery 35 days 185 days d. Receivables conversion period (inventory sold cash collected) 15 days e. Number of days between receiving inventory from suppliers and receiving cash from customers: Inventory conversion period 185 days Receivables conversion period 15 days 200 days E5-3. a. Reported net income $150,000 Add: depreciation expense 22,000 Cash from operations $172,000 b. Original reported net income $150,000 Add: original depreciation expense 22,000 Deduct: new depreciation expense (33,000) New reported net income $139,000 Add: new depreciation expense 33,000 New cash from operations $172,000 The only difference between the two scenarios is the accrual net income, which is a result of differing amounts of depreciation expense. Since depreciation is a non-cash item and all other revenues and expenses in both scenarios were in cash, cash from operations is the same under both scenarios. Copyright 2007 McGraw-Hill Ryerson Ltd. 1 E5-5. Item Classification Increase/Decrease a No effect - b Operating Decrease c Operating Increase d Financing Increase e No effect - f Operating Decrease Under GAAP for private companies. If IFRS is used can also be Financing; decrease g No effect - h Investing Decrease i Operating Decrease j Financing Increase k Financing Decrease l Financing Decrease Under IFRS dividend payments can also be classified as operating m No effect - Treasury bills are considered a cash equivalent n Investing Decrease Due to the long maturity period this would be considered an investment o No effect - No cash is involved in this transaction (land exchanged for a mortgage. Only transactions involving cash are reported on the cash flow statement. p Operating Increase E5-7. a. The sale of oil by Basanti is an operating cash flow as its within the entitys normal operations. The item would represent a cash inflow of $500,000 as Basanti has received money for the oil. b. The cash received from the sale of drilling equipment is an investing cash flow as drilling equipment is a capital asset and Basantis business isnt selling equipment. As Basanti has collected money on the sale, there would be a cash inflow of $175,000. In addition, when using the indirect method, the $54,000 loss should be added to net income when determining cash from operations. The reason is that (1) the cash effect of the sale is an investing activity on the cash flow statement, and (2) the loss isnt a cash flow; its the difference between proceeds if sale and the carrying amount of the asset. If the loss isnt removed from net income when determining cash from operations, a $54,000 understatement will result. Copyright 2007 McGraw-Hill Ryerson Ltd. 2 c. Drilling rights are capital assets and therefore would be considered an investing cash flow. The cash payment represents an outflow of $250,000. d. Maintenance performed on drilling equipment is an operating cash flow as its a normal expense that occurs in the course of operations. The item represents a cash outflow of $12,000. e. There would be no effect on cash flows as no cash has changed hands. When the government is paid the outlay would be considered an operating cash outflow. f. Under GAAP for Private Enterprises dividends are a financing cash flow as they are payments made to individuals who invested in the company. Under IFRS managers can choose to classify dividend payments as operating or financing activities. The payment represents an outflow of $100,000. g. Interest paid is considered an operating cash flow under GAAP for Private Enterprises. Under IFRS managers can choose to classify interest payments as operating or financing activities. Regardless of the method used, the item represents a cash outflow of $20,000. E5-9. Change Net income $222,000 $222,000 Accounts receivable on January 1, 2015 595,000 Accounts receivable on December 31, 2015 520,000 (75,000) Inventory on January 1, 2015 975,000 Inventory on December 31, 2015 910,000 (65,000) Accounts payable on January 1, 2015 640,000 Accounts payable on December 31, 2015 595,000 (45,000) Depreciation expense 310,000 310,000 Joggins Inc. Cash From Operations - Indirect Method For the Year Ended 2015 Cash From Operations: Net Income $222,000 Adjustments for none cash items: Add: Depreciation $310,000 310,000 Changes in non-cash current operating accounts: Add: Decrease in accounts receivable 75,000 Add: Decrease in inventory 65,000 Less: Decrease in accounts payable (45,000) 95,000 Cash From Operations $627,000 Copyright 2007 McGraw-Hill Ryerson Ltd. 3 Net income is comprised of both cash flows, deferrals, and accruals. Thus net income includes items that dont represent cash flows. Cash from operations includes only transactions that involved operating cash inflows or outflows. E5-11. Quesnel Ltd. Cash Flow Statement For the Year Ended December 31, 2014 Cash From Operations: Net Income ($151,300) Adjustments for non-cash items: Depreciation (add) $75,000 Gain on sale of land (subtract) (14,000) 61,000 Changes in non-cash working capital Increase in accounts receivable (18,000) Decrease in inventory 33,000 Increase in prepaids (3,000) Decrease in accounts payable (12,200) Decrease in taxes payable (4,500) (4,700) Cash From Operations: (95,000) Investing Activities: Sale of land 168,000 Purchase of long-term investments (50,000) Purchase of property, plant, and equipment (275,000) Cash from Investing Activities (157,000) Financing Activities: New bank loans 250,000 Issuance of common shares 80,000 Issuance of long-term debt 125,000 Retirement of long-term debt (165,000) Dividends (22,000) Cash from Financing 268,000 Cash flow for the year (Change in cash) 16,000 Cash from Beginning (2014) 52,000 Change in Cashcash flow for year 16,000 End Cash balance (2014) $68,000 E5-13. 2015 2014 Change Copyright 2007 McGraw-Hill Ryerson Ltd. 4
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