ACCT1021 Lecture 25: Chapter Thirteen Lecture Notes (25&26)

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3 Dec 2016

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Introduction : the cash flow statement is designed to provide information about the nature and sources of an entity"s cash inflows and outflows. This information is important because the balance sheet and income statement, by themselves, will not provide sufficient information on how a company obtained and spent its cash. The balance sheet will inform the investor as to what a company"s assets and liabilities are as of a particular date, but it does not explain how those assets were funded. This important information is provided by the cash. Cash & cash equivalents: the statement of cash flows reconciles the beginning and ending balances of cash and cash equivalents. Cash equivalents include all short-term, highly liquid investments. For an instrument to qualify as a cash equivalent, the following must be satisfied: 1. The instrument is easily convertible to known amounts of cash.

Related Questions

Joyner Companyâs income statement for Year 2 follows:


Sales	$	715,000
Cost of goods sold		286,000
Gross margin		429,000
Selling and administrative expenses		217,000
Net operating income		212,000
Nonoperating items:
Gain on sale of equipment		8,000
Income before taxes		220,000
Income taxes		88,000
Net income	$	132,000

Its balance sheet amounts at the end of Years 1 and 2 are as follows:

	Year 2		Year 1
Assets
Cash	$	79,400	$	70,000
Accounts receivable		265,000		144,000
Inventory		319,000		277,000
Prepaid expenses		10,500		21,000
Total current assets		673,900		512,000
Property, plant, and equipment		639,000		511,000
Less accumulated depreciation		166,600		132,000
Net property, plant, and equipment		472,400		379,000
Loan to Hymans Company		43,000		0
Total assets	$	1,189,300	$	891,000
Liabilities and Stockholders' Equity
Accounts payable	$	316,000	$	266,000
Accrued liabilities		45,000		50,000
Income taxes payable		85,400		82,000
Total current liabilities		446,400		398,000
Bonds payable		200,000		116,000
Total liabilities		646,400		514,000
Common stock		348,000		284,000
Retained earnings		194,900		93,000
Total stockholders' equity		542,900		377,000
Total liabilities and stockholders' equity	$	1,189,300	$	891,000

Equipment that had cost $31,900 and on which there was accumulated depreciation of $10,000 was sold during Year 2 for $29,900. The company declared and paid a cash dividend during Year 2. It did not retire any bonds or repurchase any of its own stock.

Required:

1. Using the indirect method, compute the net cash provided by/used in operating activities for Year 2.

2. Prepare a statement of cash flows for Year 2.

3. Compute the free cash flow for Year 2.

Complete this question by entering your answers in the tabs below.

Required 1

Using the indirect method, compute the net cash provided by/used in operating activities for Year 2. (List any deduction in cash and cash outflows as negative amounts.)

Weaver Company
Statement of Cash FlowsâIndirect Method (partial)

Required 2

Prepare a statement of cash flows for Year 2. (List any deduction in cash and cash outflows as negative amounts.)

Joyner Company
Statement of Cash Flows
For Year 2
Operating activities:

Investing activities:





Financing activities:






Beginning cash and cash equivalents
Ending cash and cash equivalents

Required 3

Compute the free cash flow for Year 2. (Negative amount should be indicated by a minus sign.)

Free cash flow

coffeeduck633

Consider the following transactions pertaining to Retail Traders Company. Amounts in paren-
theses indicate a decrease in the account.

Assets = Liabilities + Ownersâ Equity

explanation	cash	inventory	acc payable	common stock	retained earnings
beg balance		10,000	5,000	3,000	2,000
credit purchases		100,000	100,000
cash sales	115,000				115,000
COGS		(90,000)			(90,000)
cash paid to suppliers	(85,000)		(85,000)
End balance	30,000	20,000	20,000	3,000	27,000

Required:

1. Based on this information, prepare an income statement and statement of cash flows.
2. Provide an intuitive explanation of how the adjustments made to net income in the cash vert the
accrual numbers to cash flow numbers.

Source: P4-4
Preparing the income
statement and statement of
cash flows (LO 4-5,
LO 4-8)

taupealligator611

NFORMATION

NUWARE LIMITED

STATEMENT OF CASH FLOWS FOR THE YEAR ENDED 31 DECEMBER 2019 R
Cash flows from operating activities	2 540 000
Profit before interest and tax	7 700 000
Non-cash flow adjustments	700 000
Add: Depreciation	700 000
Profit before working capital changes Working capital changes	8 400 000 690 000
Decrease in inventory Decrease in receivables Increase in payables	180 000 310 000 200 000
Cash generated from operations	9 090 000
Interest paid	(150 000)
Dividends paid	(4 900 000)
Company tax paid	(1 500 000)
Cash flow from investing activities	(4 200 000)
Land, buildings and equipment purchased	(4 200 000)
Cash flow from financing activities	1 100 000
Increase in long-term borrowings	1 100 000
Net decrease in cash and cash equivalents	?
Cash and cash equivalents at beginning of year	?
Cash and cash equivalents at end of year	?

Why was depreciation included in computing the cash flow from operating activities? (2 marks)

Calculate the cash balance on 31 December 2019 if there was a bank overdraft of R460 000 on 31 December 2020. (2 marks)

Based on the cash flow information above, how does the company appear to be performing? Explain by referring to at least five items in the cash flow statement. (10 marks)

Long term loans were increased during 2020. Was this the most appropriate way of financing the purchase of assets? (3 marks)

1.5 What cash receipts increase cash but not profits? (3 marks)

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ACCT1021 Lecture 25: Chapter Thirteen Lecture Notes (25&26)

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