AFM291 Chapter Notes - Chapter 4: Net Income, Weighted Arithmetic Mean, Cash Flow Statement

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rosegoldfish433

3 Apr 2014

School

University of Waterloo

Department

Accounting & Financial Management

Course

AFM291

Professor

Kareen Brown

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Document Summary

Investing: using the funding to buy assets and invest in people; divestitures: operating: using the assets and people to earn profits, balance sheet aims to capture the financing and investing activities. Income statement aims to capture the operating and performance-related activities: cash flow statement looks at the interrelationship between the activities, identify the uses and limitations of an income statement. Format of the income statement: elements of the income statement: revenues, expenses, gains, losses, and other comprehensive income (pg. 145, distinction between revenue and gain depends on how the enterprise"s ordinary or typical business activities are defined. Intermediate components of the income statement (pg. 150: continuing operation: Operating (sales or revenue, cogs, selling exp. , and admin. or general exp. ) Non-operating (other revenues and gains, other exp. and losses) The operations and cash flows have been, or will be, eliminated. The enterprise will not have any continuing involvement: separate component.

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Foxboro Company%u2019s income statement for Year 2 follows:

Foxboro Company

Income Statement

Sales $ 710,000

Cost of goods sold 234,000

Gross margin 476,000

Selling and administrative expenses 218,000

Net operating income 258,000

Gain on sale of equipment 10,000

Income before taxes 268,000

Income taxes 80,400

Net income $ 187,600

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

Foxboro Company

Balance Sheet

Year 2 Year 1

Assets

Cash $ 143,900 $ 106,100

Accounts receivable 269,000 119,000

Inventory 318,000 270,000

Prepaid expenses 9,500 19,000

Total current assets 740,400 514,100

Plant and equipment 622,000 517,000

Accumulated depreciation 166,300 131,600

Net plant and equipment 455,700 385,400

Loan to Harker Company 47,000 0

Total assets

$ 1,243,100 $ 899,500

Liabilities and Stockholders' Equity

Accounts payable $ 310,000 $ 260,000

Accrued liabilities 46,000 59,000

Income taxes payable 85,900 80,500

Total current liabilities 441,900 399,500

Bonds payable 207,000 119,000

Total liabilities 648,900 518,500

Common stock 345,000 286,000

Retained earnings 249,200 95,000

Total stockholders' equity 594,200 381,000

Total liabilities and stockholders' equity $ 1,243,100 $ 899,500

Equipment that had cost $31,600 and on which there wasaccumulated depreciation of $11,000 was sold during Year 2 for$30,600. The company declared and paid a cash dividend during Year2. It did not retire any bonds or repurchase any of its ownstock.

Required:

Using the indirect method, compute the net cash for operatingactivities for Year 2. (Negative amount should be indicated by aminus sign. Omit the "$" sign in your response.)

Net cash operating activities $

Prepare a statement of cash flows for Year 2. (Amounts to bededucted should be indicated with a minus sign. Omit the "$" signin your response.)

Foxboro Company

Statement of Cash Flows

Operating activities:

Adjustments to convert net income to cash basis:

Net cash operating activities

Investing activities:

Net cash investing activities

Financing activities:

Net cash financing activities

Cash balance, beginning of year

Cash balance, end of year $

Compute the free cash flow for Year 2.(Negative amount should beindicated by a minus sign. Omit the "$" sign in your response.)

Free cash flow $

limemink763

For each of the following transactions:

indicate whether it will result in an increase (+), decrease (â), or have no effect (NE) on cash flows;

classify each of the transactions as an operating (O), investing (I), financing (F), or significant noncash investing / financing (NC) activity or no effect (NE)


	Impact (+), (â) or (NE)	Classification (O), (I), (F), (NC) or (NE)
Repayment of mortgage payable
Payment of interest on mortgage
Purchase of land in exchange for common shares
Issue of preferred shares for cash
Collection of accounts receivable
Declaration of cash dividend
Payment of cash dividend
Cash purchase of inventory

Selected information (CAD millions) are presented for two firms ROP and DUL, operating in the same industries:

	DUL	ROH

Net income	$ 4,529	$ 161
Net cash provided by operating activities	6,539	212
Net cash provided (used) by investing activities	(1,420)	35
Net cash provided (used) by financing activities	735	(176)

Net increase in cash and cash equivalents	$ 5,854	$ 71

Cash and cash equivalents, beginning of year	$ 2,078	$ 267
Cash and cash equivalents, end of year	$ 7,932	$ 338

Required:

i) Compare and discuss the performance / activity the two companies based on the above Cash Flow and Net Income information.

ii) Which company appears to be in a stronger Cash position? Why?

aquamarinelion756

1. A creditor is reviewing Hoffman Electronicsâ statements ofretained earnings for the last 3 years. The creditor is trying todetermine whether a substantial loan should be given to HoffmanElectronics. Which question will most likely be answered byreviewing the statement of retained earnings?

a. Does Hoffman Electronics make risky investments that impedethe cash flow of the firm?

b. What was the ending permanent account balance for HoffmanElectronics last quarter?

c. What assets owned by Hoffman Electronics are valuable enoughto cover debt repayment?

d. Does Hoffman Electronics have enough earnings to pay bothdividends and debts?

2. True or false. By reviewing a companyâs statement of retainedearnings over multiple reporting periods, an investor can evaluatethe companyâs future growth potential based on net incomechanges.

3. A creditor would most likely be interested in reviewing afirmâs statement of retained earnings to determine if the firm

a. exhibits liquidity.

b.can repay its debt obligations.

c.makes risky investments.

d.has sufficient receivables.

4. On statement of cash flow, the repayment of loans iscategorized as a cash flow from ____activities.

a. operating

b. financing

5."Fill in the blank" question: select the correct answer.

In a statement of cash flows, cash inflows that result fromproviding goods to customers are included in the section calledâcash flows from_______ activities.

a. investing

b. operating

c. sales

d. investing

6. Creditors want to know whether Photon, Inc. uses itsavailable cash to purchase new equipment. Which section of thestatement of cash flows would provide this information?

a.Cash flows from operating activities

b.Cash flows from sales activities

c.Cash flows from financing activities

d.Cash flows from investing activities

7. Creditors are examining the statement of cash flows forPhoton, Inc. Which of the following questions can be answered byreviewing the statement of cash flows?

a. What is the average net income of Photon?

b.What type of assets does Photon possess?

c.Does Photon reset its temporary accounts?

d.Does Photon pay its bills when they are due?

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AFM291 Chapter Notes - Chapter 4: Net Income, Weighted Arithmetic Mean, Cash Flow Statement

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