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Financial Accounting: A Critical Approach 3e _ Chapter 5 Answers

19 Pages
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Department
Accounting
Course Code
ACC 110
Professor
Else Grech

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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 expense22,000
Cash from operations $172,000
b.
Original reported net income$150,000
Add: original depreciation expense22,000
Deduct: new depreciation expense(33,000 )
New reported net income$139,000
Add: new depreciation expense33,000
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
Copyright © 2007 McGraw-Hill Ryerson Ltd. 1
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all other revenues and expenses in both scenarios were in cash, cash from operations is
the same under both scenarios.
E5-5.
ItemClassification Increase/Decrease
aNo effect-
bOperating Decrease
cOperating Increase
dFinancing Increase
eNo effect-
fOperating DecreaseUnder GAAP for private companies. If IFRS is used can also
be Financing; decrease
gNo effect-
hInvesting Decrease
iOperating Decrease
jFinancing Increase
kFinancing Decrease
lFinancing DecreaseUnder IFRS dividend payments can also be classified as
operating
mNo effect -Treasury bills are considered a cash equivalent
nInvesting DecreaseDue to the long maturity period this would be considered an
investment
oNo effect-No cash is involved in this transaction (land exchanged for a
mortgage. Only transactions involving cash are reported on the
cash flow statement.
pOperating Increase
E5-7.
a.The sale of oil by Basanti is an operating cash flow as it’s within the entity’s
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 Basanti’s business isn’t 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)
Copyright © 2007 McGraw-Hill Ryerson Ltd. 2
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the loss isn’t a cash flow; it’s the difference between proceeds if sale and the
carrying amount of the asset. If the loss isn’t removed from net income when
determining cash from operations, a $54,000 understatement will result.
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
it’s 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
$222,00
0
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 expense310,000 310,000
Joggins Inc.
Cash From Operations - Indirect Method
For the Year Ended 2015
Cash From Operations:
Net Income$222,00
Copyright © 2007 McGraw-Hill Ryerson Ltd. 3
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Description
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 Copyright 2007 McGraw-Hill Ryerson Ltd. 1 www.notesolution.com all other revenues and expenses in both scenarios were in cash, cash from operations is the same under both scenarios. 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) Copyright 2007 McGraw-Hill Ryerson Ltd. 2 www.notesolution.com 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. 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 $222,00 Net income $222,000 0 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 $222,00 Copyright 2007 McGraw-Hill Ryerson Ltd. 3 www.notesolution.com 0 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 $627,00 Cash From Operations 0 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) Copyright 2007 McGraw-Hill Ryerson Ltd. 4 www.notesolution.com
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