fa2e chapter13 solutions manual

CH 13-OverviewCHAPTER 13STATEMENT OF CASH FLOWSOVERVIEW OF BRIEF EXERCISES, EXERCISES, PROBLEMS, AND CRITICAL THINKING CASESBriefLearningExercisesTopicObjectivesSkillsB. Ex. 13.1Cash flows from operations (direct)3AnalysisB. Ex. 13.2Cash flows from operations (indirect)7AnalysisB. Ex. 13.3Cash flows from operations (direct)3AnalysisB. Ex. 13.4Cash flows from operations (indirect)7AnalysisB. Ex. 13.5Cash flows from investing activities4AnalysisB. Ex. 13.6Cash flows from financing activities4AnalysisB. Ex. 13.7Cash payment for goods3AnalysisB. Ex. 13.8Determining beginning cash balance2AnalysisB. Ex. 13.9Reconciling profit to cash from operations6AnalysisB. Ex. 13.10Prepare statement of cash flows2AnalysisLearning ObjectivesExercisesTopicSkills13.1Using a cash flow statement1, 2Analysis, communication13.2Using a cash flow statement1, 2, 6Analysis, communication13.3Using noncash accounts to compute cash flows4Analysis13.4Relationship between accrual and cash flows3, 6Analysis, communication13.5Accrual versus cash flows3Analysis13.6Investing activities and interest revenue3, 6Communication13.7Format of a cash flow statement2Analysis13.8Cash effects of business strategies8Analysis, communication, judgment13.9Indirect method6, 7Analysis, communication13.10Indirect method7Analysis13.11Classification of cash flows2Analysis13.12Classification of cash flows2Analysis13.13Cash flows from investing activities4Analysis, communication, judgment13.14Cash flows from financing activities4Analysis, communication, judgment13.15Real World: adidas AG, Herzogenaurach1, 2, 4Analysis, communication, judgment, research

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CH 13-Overview (p.2)ProblemsLearningSets A, BTopicObjectivesSkills13.1 A,BPreparing a statement of cash flowsdirect method (short)24Analysis13.2 A,BInvesting activities4Analysis13.3 A,BInvesting activities4Analysis, communication, judgment13.4 A,BCash flow from operating activitiesdirect method3, 8Analysis, communication, judgment13.5 A,BCash flow from operating activitiesindirect method6, 7Analysis, communication, judgment13.6 A,BPreparing a statement of cash flowsdirect method; comprehensive24, 6, 8Analysis, communication, judgment13.7 A,BPreparing a worksheet and statementof cash flows; evaluate thecompanys liquidity-indirect method.19Analysis, communication, judgment13.8 A,BPreparing a worksheet and statement of cash flows; evaluate the companys financial positionindirect method.19Analysis, communication, judgmentCritical Thinking Cases13.1Using a statement of cash flows1Analytical, communication, judgment13.2Budgeting at a personal level1, 8Analytical, communication, judgment13.3Window dressing; effects on profit for the period and net cash flow1, 4, 8Analytical, communication, judgment13.4Peak pricing8Analytical, communication, judgment13.5Real World: CLP Holdings, Hysan Cash Flow Analysis24Analytical, communication, judgment, research(Internet)


Description ProblemsDESCRIPTIONS OF PROBLEMS AND CRITICAL THINKING CASESBelow are brief descriptions of each problem and case. These descriptions are accompanied by the estimated time (in minutes) required for completion and by a difficulty rating. The time estimates assume use of the partially filled-in working papers.Problems (Sets A and B)13.1 A,BWong Company/Best Company30 MediumPrepare a statement of cash flows. Emphasis is on format of the statement, with computations held to a minimum. However, sufficient computations are required to assure that students are able to distinguish between cash flows and accrual basis measurements. Uses the direct method.13.2 A,BNew World Co./Admiralty Fashions25 EasyPrepare the investing activities section of a statement of cash flows by analyzing changes in statement of financial position accounts and gains and losses reported in the income statement.13.3 A,BHayes Export Co./RPZ Imports25 EasyPrepare the investing activities section of a statement of cash flows. Problem demonstrates how this section of the financial statement can be prepared by analyzing income statement amounts and changes in statement of financial position accounts.13.4 A,BGalaxy Co./Royce Interiors Co.30 MediumPrepare the operating activities section of a statement of cash flows from accounting records maintained using the accrual basis of accounting. Students also are to explain how more efficient asset management could increase cash flow provided by operating activities. Uses the direct method. (Problem *135 uses the same data but requires use of the indirect method.)13.5 A,BGalaxy Co. (Indirect)/Royce Interiors Co. (Indirect)25 MediumUsing the data provided in Problem 13.4 A,B, prepare the operating activities section of a statement of cash flows using the indirect method.13.6 A,B21st Century Technologies/Golden Technologies45 StrongA comprehensive problem covering conversion from the accrual basis to the cash basis and preparation of a statement of cash flows. Uses the direct method.*


Description Problems (p.2)Problems (cont'd)13.7 A,BSatellite 2011/CONNECT60 Strong (P13.7A)A comprehensive problem covering all learning objectives. P13.7A includes a worksheet, the indirect method, and analysis of the companys financial position. P13.7B does not include a worksheet and uses the indirect method. We assign this to groups and let them deal with the worksheet mechanics on their own.40 Strong (P13.7B)13.8 A,BMiracle Tool Co./Extra-Ordinaire Co.60 StrongA comprehensive problem covering all learning objectives. Includes a worksheet, the indirect method, and analysis of the companys financial position. We assign this to groups and let them deal with the worksheet mechanics on their own.*


Desc. of CasesCritical Thinking Cases13.1Another Look at Allison Company25 StrongStudents are asked to review the cash flow statement of Allison Company (the company used as an example throughout the chapter) and to evaluate the company's ability to maintain its present level of dividends.13.2Cash Budgeting for You as a Student15 EasyA simple case that illustrates the usefulness of cash budgeting in the environment of a college student.13.3Lookin' Good?45 MediumAn automobile manufacturer is in serious financial difficulty, and management is considering several proposals to increase reported profit for the period and net cash flow. Students are asked to evaluate the probable effects of each proposal. This case can lead into an open-ended discussion of window dressing in annual statements.13.4Peak Pricing15 EasyStudents are to discuss various aspects of peak pricing and discuss how it might be applied in specific situations. Also, they are to describe situations in which peak pricing might be considered unethical.13.5Comparing Cash Flow Information from Two Companies30 MediumInternetVisit a website that actually provides assistance in preparing cash budgets and statements of cash flows.


Q1-5SUGGESTED ANSWERS TO DISCUSSION QUESTIONS1.The primary purpose of a statement of cash flows is to provide information about the cash receipts and cash payments of a business. A related purpose is to provide information about the investing and financing activities of the business.2.The income statement provides the better measurement of profitability, especially when the businessbusiness is financially sound and short-run survival is not the critical issue. The statement of cash flows is designed for measuring solvency, not profitability. An income statement, on the other hand, is specifically designed to measure profitability but gives little indication of solvency.3.Examples of cash receipts and of cash payments in the three major classifications of a cash flow statement are shown below (two receipts and two payments required):a.Operating activities:Receipts:(1)Cash receipts from customers.(2)Dividends and interest received.Payments:(1)Cash paid to suppliers and employees.(2)Interest paid.(3)Income taxes paid.b.Investing activities:c.Financing activities:Receipts:Receipts:(1)Sales of investments.(1)Short-term or long-term borrowing.(2)Collecting loans.(2)Issuance of share capital.(3)Sales of property, plant and equipment.Payments:Payments:(1)Purchases of investments.(1)Repayment of debt.(2)Lending cash.(2) (3)Retirement of outstanding shares. Payment of dividends.(3)Purchases of property, plant and equipment.4.Net cash from operating activities generally reflects the cash effects of transactions entering into the determination of profit. Because FASB considers that interest revenue and interest expense enter into the determination of profit for the period , these items are classified as operating activities in the United States.5.In the long run, it is most important for a business to have positive cash flows from operating activities. To a large extent, the ability of a business to generate positive cash flows from financing activities is dependent upon its ability to generate cash from operations. Investors are reluctant to invest money in a business that does not have an operating cash flow sufficient to assure interest and dividend payments.Also, a business cannot sustain a positive cash flow from investing activities over the long run. A company can only sell productive assets for a limited period of time. In fact, a successful and growing company will often show a negative cash flow from investing activities, as the company is increasing its investment in property, plant and equipment.7


Q6-106.Among the classifications shown in the cash flow statement, a successful and growing company is least likely to report a positive cash flow from investing activities. A growing company is usually increasing its investment in property, plant and equipment, which generally leads to a negative cash flow from investing activities. If the company is successful and growing, however, the cash flows from operating activities and from financing activities usually are positive.7.Profit for the period may differ from the net cash from operating activities as a result of such factors as:(1)Depreciation and other noncash expenses that enter into the determination of period for the period .(2)Short-term timing differences between the cash basis and accrual basis of accounting. These include changes in the amounts of accounts receivable, inventories, prepaid expenses, accounts payable, and accrued liabilities.(3)Nonoperating gains and losses that, although included in the measurement of profit for the period , are attributable to investing or financing activities rather than to operating activities.8.The direct method identifies the major operating sources and uses of cash, using such captions as Cash receipts from customers. The indirect method, on the other hand, reconciles profit for the period to the net cash from operating activities by showing a series of adjustments to the profit for the period figure.Both methods result in exactly the same net cash from operating activities.9.One purpose of a statement of cash flows is to provide information about all the investing and financing activities of a business. Although the acquisition of land by issuing share capital does not involve a receipt or payment of cash, the transaction involves both investing and financing activities. Therefore, these activities are disclosed in a supplementary schedule that accompanies the statement of cash flows.10.The credit to the Land account indicates a sale of land and, therefore, a cash receipt. However, the $220,000 credit represents only the cost (book value) of the land that was sold. This amount must be adjusted by any gain or loss recognized on the sale in order to reflect the amount of cash received.11


Q11-1511.Credits to share capital accounts usually indicate the issuance of additional shares. Assuming that these shares were issued for cash, the transaction would be presented in the financing activities section of a statement of cash flows as follows:Proceeds from issuance of shares ($12,000,000 + $43,500,000) $55,500,00012.The amount of cash dividends paid during the current year may be determined as follows:Dividends declared during the year .$4,300,000Add: Decrease during the year in the liability for dividends payable($1,500,000 - $900,000) .$600,000Dividends paid during the year $4,900,00013.Free cash flow is that portion of the net cash from operating activities that is available for discretionary purposes after the basic obligations of the business have been met.From a short-term creditors point of view, free cash flow is a buffer, indicating that the business brings in more cash than it must have to meet recurring commitments. Long-term creditors view free cash flow as evidence of the companys ability to meet interest payments and to accumulate funds for the eventual retirement of long-term debt.From the shareholders viewpoint, free cash flow indicates a likelihood of future dividend increases or, perhaps, expansion of the business, which will increase future profitability.Management views free cash flow positively because it is available for discretionary purposes rather than already committed to basic operations.In summary, everyone associated with the business views free cash flow favorablyand the more, the better.14.Peak pricing means charging higher prices in periods in which customer demand exceeds the companys capacity, and lower prices in off-peak periods. This serves the dual purposes of increasing revenue during peak periods, and allowing the business to serve more customers by shifting excess demand to off-peak periods.Common examples include restaurants, which charge higher prices at dinner time, and movie theaters, which offer low matinee prices during the daytime.15.Speeding up the collection of accounts receivable does not increase the total amount collected. Rather, it merely shifts collections to an earlier time period. The only period(s) in which cash receipts actually increase are those in which collections under both the older and newer credit periods overlap.


BE13.1,2,3,4,5SOLUTIONS TO BRIEF EXERCISESB.Ex. 13.1Cash flows from operating activities:(in thousands)Cash receipts from customers$240,000Cash received for interest and dividends50,000Cash paid to suppliers and employees(127,000)Net cash from operating activities$163,000B.Ex. 13.2Profit$4,300,000Adjustments to reconcile profit for the period to net cash from operations:Depreciation expense$670,000Increase in accounts receivable(350,000)Increase in accounts payable560,000880,000Net cash from operating activities$5,180,000B.Ex. 13.3Cash flows from operating activities:Cash receipts from customers$7,500,000Cash paid to purchase inventory(3,350,000)Cash paid to employees(2,300,000)Net cash from operating activities$1,850,000B.Ex. 13.4Profit for the period$6,660,000Adjustments to reconcile profit for the period to net cash from operations:Increase in accounts receivable($500,000)Decrease in inventory230,000Decrease in accounts payable(550,000)Increase in accrued expenses payable140,000(680,000)Net cash from operating activities$5,980,000B.Ex. 13.5Cash used for investing activities:Cash paid for investments$(450,000)Cash paid for PPE assets(1,270,000)Proceeds from sales of PPE assets660,000Net cash used in investing activities($1,060,000)


BE13.6,7,8,9,10B.Ex. 13.6Cash flows from financing activities:Proceeds from issuing ordinary shares$5,600,000Proceeds from issuing preference shares360,000Cash paid to purchase treasury shares(350,000)Cash paid for dividends(240,000)Net cash from financing activities$5,370,000B.Ex. 13.7Cash payments for purchases:Cost of goods sold$1,001,000Add: Increase in inventory($430,000 $350,000)80,000Deduct: Increase in accounts payable($300,000 $230,000)(70,000)Net cash payments for purchases$1,011,000B.Ex. 13.8Cash balance at the beginning of the year:Ending balance$1,550,000Add: Cash used in investing activities670,000Deduct: Cash from operating activities(1,450,000)Cash from financing activities(100,000)$670,000B.Ex. 13.9Profit for the period$560,000Adjustments to reconcile profit for the period to net cash from operations:Depreciation expense$120,000Increase in accounts receivable(40,000)Decrease in inventory60,000Increase in accounts payable30,000Decrease in accrued expenses payable(20,000)Net cash from operating activities$710,000B.Ex. 13.10Watson, Co.Statement of Cash FlowsFor year ended _____________Cash flows from operating activities$1,360,000Cash flows used in investing activities(560,000)Cash flows used in financing activities(340,000)Change in cash$460,000Cash, beginning of year8,900,000Cash, end of year$9,360,000


E13.1,2SOLUTIONS TO EXERCISESEx. 13.1a.The operating activities section generally includes the cash frrom and used for those transactions that are included in the determination of profit for the period. The investing activities section includes cash from and used for the purchase and disposal of assets that are not held for resale, primarily investments, and PPE and intangible assets. Financing activities generally include cash from and used for debt and equity financing transactions.b.Wallace Company's cash increased significantly during the year, going from $75,000 to $243,000. Operations were strong, providing $200,000 of positive cash flow. Based on the limited information provided, interpreting the use of $120,000 for investing activities is difficult, but one possible positive interpretation is that the company is preparing for the future by acquiring additional PPE and other assets that will be required. The increase in cash of $88,000 from financing activities indicates that the company is expanding its financing in some ways, probably some combination of selling bonds or other debt securities and selling ordinary, preference, or treasury shares. While the limited information presented makes substantive interpretation of the overall cash picture highly speculative, it is clear that the company has a much larger cash balance at the end than at the beginning of the year and that the increase is tied directly to its success in generating cash from its ongoing, normal operations.Ex. 13.2Note: All dollar figures in the following calculations are in thousands.a.Cash from operations $280Expenditures for property, plant and equipment ..(30)Dividends paid (140)Free cash flow .$110b.The major sources and uses of cash from financing activities during 2013 were:Source: noneUse: Dividend paid $140Use: Retirement of Debt $150Financing activities resulted in a decline in cash of $290 in 2013.c.Cash and cash equivalents decreased by $5,000 during 2013, moving the cash balance from $50,000 to $45,000. The company paid dividends of $140,000 in 2013, and appears to be in a relatively strong cash position should it decide to pay dividends in the future.d.(1)The gain on the sale of equity securities represents a reclassification of this item from the operating activities section of the statement of cash flows to the investing activities section of the statement of cash flows. If a gain is present, as in 2013, it is deducted to effectively remove the item from profit for the period; if a loss has been present, it would have been added to effectively remove it from profit for the period.


E13.2,3,4,5,6(2)The increase in accounts receivable represents credit sales which were not collected in 2013. In the indirect method calculation, this item is a decrease in the amount of cash from profit for the period because the sale was recognized in determining profit, but the cash was not received in 2013.Ex. 13.3a.Purchases of equity securities ..$1,250,000b.Proceeds from sales of equity securities ($1,400,000 bookvalue less $350,000 loss) $1,050,000Ex. 13.4a.(1)Net sales:Cash sales $2,850,000Credit sales 4,600,000Net sales reported as revenue in the income statement$7,450,000(2)Cash received from collecting accounts receivable:Credit sales $4,600,000Add: Decrease in accounts receivable .320,000Collections of accounts receivable $4,920,000(3)Cash receipts from customers:Net sales (includes cash sales and credit sales) .$7,450,000Add: Decrease in accounts receivable 320,000Cash receipts from customers .$7,770,000b.Cash receipts from customers has two elements: (1) cash sales and (2) collections of accounts receivable. For cash sales, the amounts of sales and cash receipts are the same. However, collections on accounts receivable differ from the amount of credit sales. If accounts receivable increased, credit sales for the period exceeded cash collections on these accounts. If, however, accounts receivable decreased, cash collections of accounts receivable exceeded credit sales. Thus, cash received from customers may be greater or less than the amount of net sales.Ex. 13.5Cash payments to suppliers of goods:Cost of goods sold ..$ 29,750,000Add:Increase in inventory ($8,200,000 - $7,800,000) ..$400,000Decrease in accounts payable ($5,000,000 - $4,300,000)700,0001,100,000Cash payments to suppliers of goods .$ 30,850,000Ex. 13.6The new loans made ($150 million) will appear among the investing activities of the company as a cash outflow. The $360 million collected from borrowers will be split into two cash flows. The $300 million in interest revenue will be included among the cash inflows from operating or investing activities, whereas the $60 million in principal amounts collected from borrowers ($360 million - $300 million) will appear as a cash inflow from investing activities.


E13.7,8Ex. 13.7DISCOVERY BAY OUTFITTERS, Co.Statement of Cash FlowsFor the Year Ended 31 December, 2013Cash flows from operating activities:Cash receipts from customers $7,950,000Interest and dividends received .$270,000Cash from operating activities ..$8,220,000Cash paid to suppliers and employees ..$(6,350,000)Interest paid .$(190,000)Income taxes paid ..$(710,000)Cash disbursed for operating activities .$(7,250,000)Net cash from operating activities$970,000Cash flows from investing activities:Loans made to borrowers $(50,000)Collections on loans .$40,000Cash paid to acquire property, plant and equipment ..$(210,000)Proceeds from sales of property, plant and equipment$90,000Net cash used for investing activities $(130,000)Cash flows from financing activities:Proceeds from short-term borrowing .$100,000Dividends paid ..$(550,000)Net cash used for financing activities ..$(450,000)Net increase in cash and cash equivalents .$390,000Cash and cash equivalents, 1 January .$358,000Cash and cash equivalents, 31 December $748,000Ex. 13.8a.(1)Expenditures for R&D are an operating activity. In the short term, reducing these expenditures will increase the net cash from operating activities.(2)In the long run, reducing expenditures for R&D may reduce cash flows from operations by reducing the number of new products the company brings to market.b.Selling to customers using bank credit cards taps a new market of potential customers. This should increase sales and cash receipts in both the short and long term.c.(1)Reducing inventory will lessen expenditures for inventory purchases during the time that inventory levels decline. This will improve the net cash from operating activities in the near term.(2)Once inventory has stabilized at the new and lower level, monthly expenditures will become approximately equal to the inventory used. Thus, this strategy will not affect cash flows once inventory has stabilized.d.(1)Deferring taxes can postpone taxes each year. For a growing business, this can reduce annual cash outlays year after year. Thus, it can increase net cash flows over both the short and long terms.(2)At some point in the future, the early deferrals will require payment, causing the cash paid to stabilize, much like c. (2) above.e.Dividends are a financing activity, not an operating activity. Therefore, discontinuing dividends has no direct effect upon the net cash from operating activities. Over the long term, however, the business may increase its cash flows by investing the cash that it retains.


E13.10Ex. 13.10HOPE MACHINERY CO.Partial Statement of Cash FlowsFor the Year Ended 31 December 2013Cash flows from operating activities:Profit for the period.$385,000Add:Depreciation expense ..$125,000Amortization of intangible assets 40,000Nonoperating loss on sale of investments 35,000Decrease in accounts receivable 45,000Decrease in inventory 72,000Increase in accrued expenses payable ..25,000$342,000Subtotal ..$727,000Less:Nonoperating gain on sale of property, plant and equipment$90,000Increase in prepaid expenses .$12,000Decrease in accounts payable ..31,000$133,000Net cash from operating activities .$594,000


E13.11Ex. 13.11a.Operating activityb.Financing activityc.Operating or Financing activityd.Financing activitye.Operating activityf.Operating activityg.Not included in the statement of cash flows. A money market fund is viewed as a cash equivalent. Therefore, transfers between bank accounts and money market funds are not viewed as cash receipts or cash payments.h.Investing activityi.Not included in a statement of cash flows prepared by the direct method. Depreciation is a noncash expense; recording depreciation does not require any cash outlay within the accounting period.j.Operating activityk.Financing activityl.Operating or Financing activitym.Operating or Investing activityn.Investing activityo.Not included in the statement of cash flows. Transfers between cash equivalents and other forms of cash are not regarded as cash receipts or cash payments.


E13.12Ex. 13.121.Operating activity2.Financing activity3.Operating or Financing activity4.Financing activity5.Operating activity6.Operating activity7.Not included in the statement of cash flows. A money market fund is viewed as a cash equivalent. Therefore, transfers between bank accounts and money market funds are not viewed as cash receipts or cash payments.8.Investing activity9.Not included in a statement of cash flows prepared by the direct method. Amortization is a noncash expense; recording amortization does not require any cash outlay within the accounting period.10.Operating activity11.Financing activity12.Operating or Financing activity13.Operating or Investing activity14.Investing activity15.Not included in the statement of cash flows. Transfers between cash equivalents and other forms of cash are not regarded as cash receipts or cash payments.


E13.13Ex. 13.13a.Cash from investing activities:Sale of equipment$1,560,000Sale of land1,600,000Purchase of equipment(1,780,000)$1,380,000b.The amount of gain or loss is reflected in the cash receipts figure. For example, equipment that was sold for $1,560,000 at a $34,000 loss had a book value (cost, less accumulated depreciation) at the time of sale of $1,594,000:Cost, less accumulated depreciation$1,594,000Cash received from sale(1,560,000)Loss on sale$34,000Similarly, land that was sold for $1,600,000 and which resulted in a $50,000 gain had a cost of $1,550,000:Cash received from sale$1,600,000Cost(1,550,000)Gain on sale$50,000Using the amount of cash received in the calculation of cash from investing activities automatically incorporates the gain or loss on the sale.c.The following items were excluded because they are financing activities, not investing activities:Cash receipts from sale of ordinary sharesCash payments to purchase treasury shares, retire debt, and pay dividends on preference and ordinary shares


E13.9Ex. 13.9a.Added to profit for the period. In a statement of cash flows, the insurance proceeds from a fire are classified as an investing activity, not an operating activity. However, this extraordinary loss reduced the amount of profit for the period reported in the income statement. Therefore, this nonoperating loss is added back to profit for the period as a step in determining the net cash from operating activities.b.Added to profit for the period. Depreciation is a noncash expense. Although it reduces the profit for the period for the period, no cash outlay is required. Thus, to the extent of noncash expenses recorded during the period, profit for the period is less than the amount of net cash flow.c.Omitted from the computation. The transfer of cash from a bank account to a money market fund has no effect on profit for the period. Also, as a money market fund is a cash equivalent, this transfer is not regarded as a cash transaction.d.Deducted from profit for the period. An increase over the year in the amount of accounts receivable indicates that revenue recognized in the income statement (credit sales) exceeds the collections of cash from credit customers. Therefore, profit for the period is reduced by the increase in receivables which has not yet been collected.e.Omitted from the computation. Cash receipts from customers is a cash inflow shown in the direct method of computing net cash from operating activities. However, this cash inflow does not appear separately when the indirect method is used.f.Added to profit for the period for the period. A reduction in prepaid expenses indicates that the amounts expiring (and, therefore, being recognized as expense) exceed cash outlays for these items during the period. Thus, profit for the period for the period measured on the accrual basis is lower than net cash flow.g.Omitted from the computation. Declarations and payments of dividends do not enter into the determination of either profit for the period or net cash from operating activities. Therefore, these transactions do not cause a difference between these figures. Dividends paid are reported in the financing activities section as a disbursement.h.Added to profit for the period. An increase in accounts payable means that purchases of goods or expenses, measured on the accrual basis, exceed the payments during the period made to suppliers and other creditors. Thus, costs and expenses measured on the accrual basis were greater than the actual cash payments during the period.i.Deducted from profit for the period. The $2 million reduction in accrued income taxes payable means that cash payments to tax authorities exceeded by $2 million the income tax expense of the current year. Therefore, cash outlays exceeded the expenses shown in the income statement, and net cash from operating activities is smaller than profit for the period.


E13.14Ex. 13.14a.CashIf interest expense is not classified as a finacing cash flowSale of bonds$400,000Sale of treasury shares34,000Dividends on ordinary shares(60,000)Purchase of treasury shares(20,000)Net cash from financing activities$354,000If interest expense is classified as a finacing cash flowSale of bonds$400,000Interest expense78,000Sale of treasury shares34,000Dividends on ordinary shares(60,000)Purchase of treasury shares(20,000)Net cash from financing activities$432,000b.The following items were excluded from the above calculations because they are classified as indicated below in the statement of cash flows:Classified as operating activities:Cash receipts from customersCash received from interest and dividends receivedCash paid to employeesCash paid to purchase inventoryCash paid for interest expense (if not classified as a finacing cash flow)Classified as investing activities:Cash received from sale of equipmentc.Interest expense could be classified as a financing or operating activity in the statement of cash flows in accordance with IFRSs. Interest expense is classified as a financing cash flow on the ground that it is a cost of obtaining financial resources. On the other hand, FASB in the United States classifies interest expense as an operating cash flow on the ground that interest expense is an ordinary cost of doing business and is included in the determination of profit.


E13.15Ex. 13.15a.Income before taxes for 2012 were 851 million, compared with 942 million net cash from operating activities. The primary cause of the difference is increase in receivable and other assets, which accounts for 135 million of the difference. The majority of the remaining difference is attributed to increase in accounts payable and other current liabilities.b.The major uses of cash, other than operations, are as follows:Investing activities: purchases of property, plant and equipment (376 millionin in 2012 and 318 million in 2011) .Financing activities:For 2011: mainly, 167 million and 273 million were used to pay dividend and repay short-term borrowings respectively.For 2012: mainly, 496 million were proceeds from issue of a convertible bond togather with 209 million and 231 million were used to pay dividend and repay short-term borrowings respectively.c.Negative cash from investing and financing activities do not necessarily lead to a negative interpretation of a company's cash position. In adidas AG's case in 2011 and 2012, significant amounts of operating cash flows have been invested in heavy capital expenditures (which represent growth and future strength), as well as used to pay dividend and reduce short-term borrowings . In fact, the company's cash position appears to be strong as discussed below in part d.d.Free cash flow for the two years is determined as follows ( in millions) :20122011Net cash from operating activities942807Net cash used for acquiringproperty, plant, and equipment(376)(318)Cash paid for dividends(209)(167)357322While the general trend is mixed, the three primary elements in the free cash flow calculation are significant increase in cash from operations, strong investment in PPE assets in 2011 and 2012, and stable dividends paid to shareholders. In general, adidas AG, Herzogenaurach appears to be in a strong cash position.


P13.1ASOLUTIONS TO PROBLEM SET A30 Minutes, MediumPROBLEM 13.1AWONG COMPANYa.WONG COMPANYStatement of Cash FlowsFor the Year Ended 31 December 2013Cash flows from operating activities:Cash receipts from customers (1)$3,000,000Interest and dividends received$100,000Cash from operating activities$3,100,000Cash paid to suppliers and employees (2)$(2,550,000)Interest paid$(180,000)Income taxes paid$(95,000)Cash disbursed for operating activities$(2,825,000)Net cash from operating activities$275,000Cash flows from investing activities:Loans made to borrowers$(500,000)Collections on loans$260,000Cash paid to acquire property, plant and equipment$(3,100,000)Proceeds from sales of property, plant and equipment (3)$580,000Net cash used in investing activities:$(2,760,000)Cash flows from financing activities:Proceeds from issuing bonds payable$2,500,000Dividends paid$(120,000)Net cash from financing activities$2,380,000Net increase (decrease) in cash and cash equivalents$(105,000)Cash and cash equivalents, beginning of year$489,000Cash and cash equivalents, end of year$384,000Supporting computations:(1)Cash receipts from customers:Cash sales$800,000Collections on accounts receivable$2,200,000Cash receipts from customers$3,000,000(2)Cash paid to suppliers and employees:Payments on accounts payable to merchandise supplierssuppliers of goods$1,500,000Cash payments for operating expenses$1,050,000Cash paid to suppliers and employees$2,550,000(3)Proceeds from sales of property, plant and equipment:Book value of property, plant and equipment sold$660,000Less: Loss on sales of property, plant and equipment$80,000Proceeds from sales of property, plant and equipment$580,000Note to instructor:The transfer from the money market fund to the general bank account is not considered a cash receipt because a money market fund is a cash equivalent.Alternatively, interest and dividends received, and interest paid could be classified as investing cash flows and financing cash flows, respectively.


P13.2A25 Minutes, EasyPROBLEM 13.2ANEW WORLD CO.a.NEW WORLD CO.Partial Statement of Cash FlowsFor the Year Ended 31 December 2013Cash flows from investing activities:Purchases of equity securities$(750,000)Proceeds from sales of equity securities (1)$1,320,000Loans made to borrowers$(2,100,000)Collections on loans$1,620,000Cash paid to acquire property, plant and equipment (see part b)$(600,000)Proceeds from sales of property, plant and equipment (2)$120,000Net cash used for investing activities$(390,000)Supporting computations:(1)Proceeds from sales of equity securities:Cost of securities sold (credit entries toEquity Securities account)$900,000Add: Gain on sales of equity securities$420,000Proceeds from sales of equity securities$1,320,000(2)Proceeds from sales of property, plant and equipment:Cost of property, plant and equipment sold or retired$1,200,000Less: Accumulated depreciation on property,plant and equipment sold or retired$750,000Book value of property, plant and equipment sold or retired$450,000Less: Loss on sales of property, plant and equipment$330,000Proceeds from sales of property, plant and equipment$120,000b.Schedule of noncash investing and financing activities:Purchases of property, plant and equipment$1,960,000Less: Portion financed through issuance of long-term note payable$1,360,000Cash paid to acquire property, plant and equipment$600,000c.Cash must be generated to cover the companys investment needs through operating or financing activities. Ideally, cash to support investing activities should come from normal operations. If this places undue strain on the companys operations, however, financing via borrowing and/or sale of shares are alternatives the company should consider.


P13.3A25 Minutes, EasyPROBLEM 13.3AHAYES EXPORT CO.a.HAYES EXPORT CO.Partial Statement of Cash FlowsFor the Year Ended 31 December 2013Cash flows from investing activities:Purchases of equity securities$(780,000)Proceeds from sales of equity securities (1)460,000Loans made to borrowers(550,000)Collections on loans600,000Cash paid to acquire property, plant and equipment (see part b)(500,000)Proceeds from sales of property, plant and equipment (2)520,000Net cash used in investing activities$(250,000)Supporting computations:(1)Proceeds from sales of equity securities:Cost of securities sold (credit entries toEquity Securities account)$620,000Less: Loss on sales of equity securities160,000Proceeds from sales of equity securities$460,000(2)Proceeds from sales of property, plant and equipment:Cost of property, plant and equipment sold or retired$1,400,000Less: Accumulated depreciation on property, plant andequipment sold or retired1,000,000Book value of property, plant and equipment sold or retired$400,000Add: Gain on sales of property, plant and equipment120,000Proceeds from sales of property, plant and equipment$520,000b.Schedule of noncash investing and financing activities:Purchases of property, plant and equipment$1,500,000Less: Portion financed through issuance of long-term debt1,000,000Cash paid to acquire property, plant and equipment$500,000c.Management has more control over the timing and amount of outlays for investing activities than for operating activities. Many of the outlays for operating activities are contractual, reflecting payroll agreements, purchase invoices, taxes, and monthly bills. Most investing activities, in contrast, are discretionaryboth as to timing and dollar amount.


P13.4A30 Minutes, MediumPROBLEM 13.4AGALAXY CO.a.GALAXY CO.Partial Statement of Cash FlowsFor the Year Ended 31 December 2013Cash flows from operating activities:Cash receipts from customers (1)$2,920,000Interest and dividends received (2)$171,000Cash from operating activities$3,091,000Cash paid to suppliers and employees (3)$(2,476,000)Interest paid (4)$(176,000)Income taxes paid (5)$(103,000)Cash disbursed for operating activities$(2,755,000)Net cash from operating activities$336,000(1)Cash receipts from customers:Net sales$2,850,000Add: Decrease in accounts receivable$70,000Cash receipts from customers$2,920,000(2)Interest and dividends received:Dividend income (cash basis)$104,000Interest income$70,000Subtotal$174,000Less: Increase in accrued interest receivable$3,000Interest and dividends received$171,000(3)Cash paid to suppliers and employees:Cash paid to suppliers of goods:Cost of goods sold$1,550,000Add: Increase in inventories$35,000Net purchases$1,585,000Less: Increase in accounts payable to suppliers$8,000Cash paid to suppliers of goods$1,577,000Cash paid for operating expenses:Operating expenses$980,000Less: Depreciation expense$115,000Subtotal$865,000Add: Increase in short-term prepayments$5,000Add: Decrease in accrued operating expenses payable$29,000$899,000Cash paid to suppliers and employees$2,476,000(4)Interest paid:Interest expense$185,000Less: Increase in accrued interest payable$9,000Interest paid$176,000(5)Income taxes paid:Income tax expense$90,000Add: Decrease in accrued income taxes payable$13,000Income taxes paid$103,000Note to instructors: Alternatively, interest and dividends received, and interest paid could be classified as investing cash flows and financing cash flows, respectively.


P13.4A (p.2)PROBLEM 13.4AGALAXY CO. (concluded)b.In addition to more aggressive collection of accounts receivable, management could increase cash flows from operations by (only two required): Reducing the amount of inventories being held. Reducing the amount of short-term prepayments of expenses. Taking greater advantage of accounts payable as a short-term means of financing purchases of goods and services.


P13.5A25 Minutes, MediumPROBLEM 13.5AGALAXY CO. (INDIRECT)Galaxy Co.Partial Statement of Cash FlowsFor the Year Ended 31 December 2013Cash flows from operating activities:Profit$223,000Add:Depreciation expense$115,000Decrease in accounts receivable$70,000Increase in accounts payable to suppliers$8,000Increase in accrued interest payable$9,000$202,000Subtotal$425,000Less:Increase in accrued interest receivable$3,000Increase in inventories$35,000Increase in short-term prepayments$5,000Decrease in accrued operating expenses payable$29,000Decrease in accrued income taxes payable$13,000Gain on sales of equity securities$4,000$89,000Net cash from operating activities$336,000Credit sales cause receivables to increase, while collections cause them to decline. If receivables decline over the year, collections during the year must have exceeded credit sales for the year. Thus, cash receipts exceed revenue measured on the accrual basis.


P13.6A45 Minutes, StrongPROBLEM 13.6A21st CENTURY TECHNOLOGIESa.21st CENTURY TECHNOLOGIESStatement of Cash FlowsFor the Year Ended 31 December 2013Cash flows from operating activities:Cash receipts from customers (1)$3,140,000Interest received (2)$42,000Cash from operating activities$3,182,000Cash paid to suppliers and employees (3)$(2,680,000)Interest paid (4)$(38,000)Income taxes paid (5)$(114,000)Cash disbursed for operating activities$(2,832,000)Net cash from operating activities$350,000Cash flows from investing activities:Purchases of equity securities$(60,000)Proceeds from sales of equity securities (6)$72,000Loans made to borrowers$(44,000)Collections on loans$28,000Cash paid to acquire property, plant and equipment$(500,000)Proceeds from sales of property, plant and equipment (7)$24,000Net cash used in investing activities:$(480,000)Cash flows from financing activities:Proceeds from short-term borrowing$82,000Payments to settle short-term debts$(92,000)Proceeds from issuing ordinary shares (8)$180,000Dividends paid$(120,000)Net cash used in financing activities$50,000Net increase (decrease) in cash and cash equivalents$(80,000)Cash and cash equivalents, beginning of year$244,000Cash and cash equivalents, end of year$164,000Supporting computations:(1)Cash receipts from customers:Net sales$3,200,000Less: increase in accounts receivable$60,000Cash receipts from customers$3,140,000(2)Interest received:Interest revenue$40,000Add: Decrease in accrued interest receivable$2,000Interest received$42,000


P13.6A (p.2)PROBLEM 13.6A21st CENTURY TECHNOLOGIESa.(continued)(3)Cash paid to suppliers and employees:Cash paid for purchases of goods:Cost of goods sold$1,620,000Less: Decrease in inventory$60,000Net purchases$1,560,000Add: Decrease in accounts payable to suppliers$16,000Cash paid for purchases of goods$1,576,000Cash paid for operating expenses:Operating expenses$1,240,000Less: Depreciation (a noncash expense)$150,000Subtotal$1,090,000Add: Increase in prepayments$6,000Add: Decrease in accrued liab. for operating expenses$8,000Cash paid for operating expenses$1,104,000Cash paid to suppliers and employees($1,576,000 + $1,104,000)$2,680,000(4)Interest paid:Interest expense$42,000Less: Increase in accrued interest payable$4,000Interest paid$38,000(5)Income taxes paid:Income tax expense$100,000Add: Decrease in income taxes payable$14,000Income taxes paid$114,000(6)Proceeds from sales of equity securities:Cost of equity securities sold (credit entriesto the Equity Securities account)$38,000Add: Gain reported on sales of equity securities$34,000Proceeds from sales of equity securities$72,000(7)Proceeds from sales of property, plant and equipment:Book value of property, plant and equipment sold (paragraph 8)$36,000Less: Loss reported on sales of property, plant and equipment$12,000Proceeds from sales of property, plant and equipment$24,000(8)Proceeds from issuing share capital:Amounts credited to Share Capital account$20,000Add: Amounts credited to share premium account$160,000Proceeds from issuing share capital$180,000Note to instructors: Alternatively, interest and dividends received, and interest paid could be classified as investing cash flows and financing cash flows, respectively.


P13.6A (p.3)PROBLEM 13.6A21st CENTURY TECHNOLOGIES (concluded)b.(1)The primary reason why cash from operating activities substantially exceeded profit was the company's $150,000 in depreciation expense. Depreciation reduces profit, but does not affect the cash flows from operating activities.(2)The primary reason for the net decrease in cash was the large cash outlays for investing activitiesspecifically, the cash paid to acquire property, plant and equipment.c.To the extent that receivables increase, the company has not yet collected cash from its customers. Thus, if the growth in receivables had been limited to $10,000, instead of $60,000, the company would have collected an additional $50,000 from its customers. Thus, the net decrease in cash (and cash equivalents) would have been $30,000, instead of $80,000.


P13.7A60 Minutes, StrongPROBLEM 13.7ASATELLITE 2011a.SATELLITE 2011Worksheet for a Statement of Cash FlowsFor the Year Ended 31 December 2013Balance sheet effects:Effect of TransactionsBeginningDebitCreditEndingBalanceChangesChangesBalanceAssetsCash and cash equivalents$80,000(x)$43,000$37,000Accounts receivable100,000(3)750,000850,000Property, plant and equipment (netof accumulated depreciation)600,000(6)2,200,000(2)147,0002,653,000Totals780,0003,540,000Liabilities & EquityNotes payable (short-term)0(7)1,450,0001,450,000Accounts payable30,000(4)33,00063,000Accrued expenses payable45,000(5)13,00032,000Notes payable (long-term)390,000(6)350,000740,000Share capital200,000(8)500,000700,000Retained earnings115,000(1)440,000$555,000Totals=SUM(f10.f18)$780,000$2,963,000$2,963,000$3,540,000Cash effects:SourcesUsesOperating activities:Profit(1)440,000Depreciation expense(2)147,000Increase in accounts receivable(3)750,000Increase in accounts payable(4)33,000Decrease in accruedexpenses payable(5)$13,000Investing activities:Cash paid for PPE(6)$1,850,000Financing activities:Short-term borrowing(7)$1,450,000Issuance of ordinary shares(8)$500,000Subtotals$2,570,000$2,613,000Net decrease in cash(x)$43,000Totals$2,613,000$2,613,000


P13.7A (p.2)PROBLEM 13.7ASATELLITE 2011 (continued)b.SATELLITE 2011Statement of Cash FlowsFor the Year Ended 31 December 2013Cash flows from operating activities:Profit$440,000Add:Depreciation expense$147,000Increase in accounts payable$33,000Subtotal$620,000Less:Increase in accounts receivable$750,000Decrease in accrued expenses payable$13,000$763,000Net cash used in operating activities$(143,000)Cash flows from investing activities:Cash paid to acquire property, plant and equipment (see schedule)$1,850,000Net cash used in investing activities$(1,850,000)Cash flows from financing activities:Short-term borrowing from bank$1,450,000Issuance of ordinary shares$500,000Net cash from financing activities$1,950,000Net increase (decrease) in cash$(43,000)Cash and cash equivalents, 1 January 2013$80,000Cash and cash equivalents, 31 December 2013$37,000Supplementary Schedule: Noncash Investing and Financing ActivitiesPurchase of property, plant and equipment$2,200,000Less: Portion financed by issuing long-term notes payable$350,000Cash paid to acquire property, plant and equipment$1,850,000


P13.7A(p.3)PROBLEM 13.7ASATELLITE 2010 (concluded)c.Satellite 2010s credit sales resulted in $750,000 in new receivables, which were uncollected as of year-end. These credit sales all were included in the computation of profit, but those that remained uncollected at year-end do not represent cash receipts. Therefore, the cash flow from operating activities was substantially below the amount of profit measured on the accrual basis.Note to instructor: It is not uncommon for cash flows to lag behind a rising profit figure in a growing business. This is why many rapidly growing businesses find themselves strapped for cash to finance their growth.d.Satellite 2010 does not appear headed for insolvency. First, the company has a $6 million line of credit, against which it has drawn only $1,450,000. This gives the company considerable debt-paying ability. Next, if Satellite 2010s rapid growth continues, the company should not have difficulty issuing additional shares to investors as a means of raising cash. If a company is obviously successful, it usually is able to raise the cash necessary to finance expanding operations.


P13.8A60 Minutes, StrongPROBLEM 13.8AMIRACLE TOOL COMPNYa.MIRACLE TOOL COMPANYWorksheet for a Statement of Cash FlowsFor the Year Ended 31 December 2013Balance sheet effects:BeginningDebitCreditEndingBalanceChangesChangesBalanceAssetsCash and cash equivalents$100,000(x)$500,000$600,000Equity securities$200,000(8)$150,000$50,000Accounts receivable400,000(4)170,000230,000Inventories1,200,000(5)20,0001,220,000Property, plant and equipment( net of accumulated depreciation)3,000,000(9)200,000(3)350,0002,850,000Totals4,900,0004,950,000Liabilities & EquityAccounts payable500,000(6)230,000730,000Accrued expenses payable170,000(7)30,000140,000Notes payable2,450,000(10)100,000(9)180,0002,530,000Share capital1,200,000(11)150,0001,350,000Retained earnings580,000(1)340,000200,000(2)40,000Totals$4,900,000$1,230,000$1,230,000$4,950,000Cash effects:SourcesUsesOperating activities:Net loss(1)340,000Depreciation expense(3)350,000Decrease in accounts receivable(4)170,000Increase in inventory(5)20,000Increase in accounts payable(6)230,000Decrease in accrued(7)30,000expenses payableLoss on sale of equitysecurities(8)$10,000Investing activities:Proceeds from sale ofequitye securities(8)$140,000Cash paid for property, plant & equipment(9)$20,000Financing activitiesDividends paid(2)$40,000Payment of note payable(10)$100,000Issuance of shares(11)$150,000Subtotals$1,050,000$550,000Net increase in cash(x)$500,000Totals$1,050,000$1,050,000


P13.8A (p.2)PROBLEM 13.8AMIRACLE COPANY (continued)b.MIRACLE TOOL COMPANYStatement of Cash FlowsFor the Year Ended 31 December 2013Cash flows from operating activities:Net loss$(340,000)Add:Depreciation expense$350,000Decrease in accounts receivable$170,000Increase in accounts payable$230,000Loss on sale of equity securities$10,000Subtotal$420,000Less:Increase in inventory$20,000Decrease in accrued expenses$30,000$50,000Net cash from operating activities$370,000Cash flows from investing activities:Proceeds from sale of equity securities$140,000Cash paid to acquire PPE assets (see supplementary schedule)$(20,000)Net cash used in investing activities$120,000Cash flows from financing activities:Dividends paid$(40,000)Payment of note payable$(100,000)Issuance of share$150,000Net cash used in financing activities$10,000Net increase (decrease) in cash$500,000Cash and cash equivalents, 1 January 2013$100,000Cash and cash equivalents 31 Dec. 2013$600,000Supplementary Schedule: Noncash Investing and Financing ActivitiesPurchase of PPE assets$200,000Less: Portion financed through issuance of long-term debt$180,000Cash paid to acquire PPE assets$20,000


P13.8A(p.3)PROBLEM 13.8AMIRACLE TOOL COMPANY (continued)c.Miracle Tool Co. achieved its positive cash flow from operating activities basically byliquidating assets and by not paying its bills. It has converted most of its accountsreceivable into cash, which probably means that credit sales have declined substantially over the past several months. A decrease in sales shows up in theincome statement immediately, but may take months before its effects appear in astatement of cash flows.Miracle Tool Co. is not replacing PPE assets as quickly as these assets are beingdepreciated. In any given year, this may not be significant. But on the other hand, thisrelationship certainly indicates that the business is not expanding, and it may indicatethat the company is deferring replacements of PPE assets in an effort to conservecash.Miracle Tool Co. is allowing its accounts payable to rise much more quickly than it isincreasing inventory. This indicates that the company is not paying its bills as quicklyas it used to. While this conserves cash, the savings are temporary. Also, if thecompanys credit rating is damaged, this strategy may reduce both earnings and cashflows in the near future.d.Miracle Tool Co. has substantially more cash than it did a year ago. Nonetheless, the companys financial position appears to be deteriorating. Its equity securitiesa highly liquid assetare almost gone. Its accounts payable are rising rapidly, and substantially exceed the amount of cash on hand. Most importantly, sales and accounts receivable both are falling, which impairs the companys ability to generate cash from operating activities in the future. Also, the liquidity of the companys inventory is questionable in light of the declining sales.e.This company is contracting its operations. Its investment in equity securities, receivables, and PPE assets all are declining. Further, the income statement shows that operations are eroding the owners equity in the business. The decline in salesalready apparent in the income statementsoon will reduce the cash collected from customers, which is the principal factor contributing to a positive cash flow from operating activities.In summary, this company appears to be in real trouble.f.The companys principal revenue sourcesales of toolsappears to be collapsing. If nothing is done, it is likely that the annual net losses will increase, and that operating cash flows soon will turn negative. Thus, managements first decision is whether to attempt to revive the company, or liquidate it.If the company is to be liquidated, this should be done quickly to avoid future operating losses. Information should be gathered to determine whether it would be best to sell the company as a going concern or whether management should sell the assets individually. In either event, management should stop purchasing tools. Assuming that sales continue to decline, the companys current inventory appears to be approximately a one-year supply.


P13.8A(p.4)PROBLEM 13.8AMIRACLE TOOL COMPANY (concluded)If management decides to continue business operations, it should take the following actions:Expand the companys product lines! The combination tool alone can no longer support profitable operations. Also, dependency upon a single productespecially a faddish product with a limited market potentialis not a sound long-term strategy.Stop buying the combination toolat least until the current inventory is sold. This will not improve profitability, but will help cash flows. (As explained above, the companys current inventory appears about equal to next years potential sales.)Look for ways to reduce operating expenses. In 2013, sales declined by 30%, but the company was able to reduce operating expenses by only about 6.5% ($170,000 decline from a level of $2,600,000).Stop paying dividends. The company has no cash to spare. As sales continue to fall,the net cash from operating activities is likely to turn negative. Collectingexisting receivables and letting payables go unpaid can only bolster net cash flow for alimited period of time.Develop forecasts of future operations and cash flows. If a turnaround does not appear realistic, management should reconsider the option of liquidating the company.


P13.1BSOLUTIONS TO PROBLEM SET B30 Minutes, MediumPROBLEM 13.1BBEST COMPANYa.BEST COMPANYStatement of Cash FlowsFor the Year Ended 31December 2013Cash flows from operating activities:Cash receipts from customers (1)$3,040,000Interest and dividends received$40,000Cash from operating activities$3,080,000Cash paid to suppliers and employees (2)$(2,150,000)Interest paid$(130,000)Income taxes paid$(65,000)Cash disbursed for operating activities$(2,345,000)Net cash from operating activities$735,000Cash flows from investing activities:Loans made to borrowers$(690,000)Collections on loans$300,000Cash paid to acquire property, plant and equipment$(1,700,000)Proceeds from sales of property, plant and equipment (3)$490,000Net cash used for investing activities:$(1,600,000)Cash flows from financing activities:Proceeds from issuing bonds payable$2,000,000Dividends paid$(250,000)Net cash from financing activities$1,750,000Net increase (decrease) in cash and cash equivalents$885,000Cash and cash equivalents, beginning of year$115,000Cash and cash equivalents, end of year$1,000,000Supporting computations:(1)Cash receipts from customers:Cash sales$230,000Collections on accounts receivable$2,810,000Cash receipts from customers$3,040,000(2)Cash paid to suppliers and employees:Payments on accounts payable to merchandise supplierssuppliers of goods$1,220,000Cash payments for operating expenses$930,000Cash paid to suppliers and employees$2,150,000(3)Proceeds from sales of property, plant and equipment:Book value of property, plant and equipment sold$520,000Less: Loss on sales of property, plant and equipment$30,000Proceeds from sales of property, plant and equipment$490,000Note to instructor:The transfer from the money market fund to the general bank account is not considered a cash receipt because a money market fund is a cash equivalent.Alternatively, interest and dividends received, and interest paid could be classified as investing cash flows and financing cash flows, respectively.


P13.2B25 Minutes, EasyPROBLEM 13.2BADMIRALTY FASHIONSa.ADMIRALTY FASHIONSPartial Statement of Cash FlowsFor the Year Ended 31 December 2013Cash flows from investing activities:Purchases of equity securities$(650,000)Proceeds from sales of equity securities (1)$890,000Loans made to borrowers$(1,750,000)Collections on loans$500,000Cash paid to acquire property, plant and equipment (see part b)$(700,000)Proceeds from sales of property, plant and equipment (2)$800,000Net cash used for investing activities$(910,000)Supporting computations:(1)Proceeds from sales of equity securities:Cost of securities sold (credit entries toEquity Securities account)$740,000Add: Gain on sales of equity securities$150,000Proceeds from sales of equity securities$890,000(2)Proceeds from sales of property, plant and equipment:Cost of property, plant and equipment sold or retired$1,500,000Less: Accumulated depreciation on property, plant andequipment sold or retired$600,000Book value of property, plant and equipment sold or retired$900,000Less: Loss on sales of property, plant and equipment$100,000Proceeds from sales of property, plant and equipment$800,000b.Schedule of noncash investing and financing activities:Purchases of property, plant and equipment$2,200,000Less: Portion financed through issuance of long-term note payable$1,500,000Cash paid to acquire property, plant and equipment$700,000c.Cash must be generated to cover the companys investment needs through operating or financing activities. Ideally, cash to support investing activities should come from normal operations. If this places undue strain on the companys operations, however, financing via borrowing and/or sale of shares are alternatives the company should consider.


P13.3B25 Minutes, EasyPROBLEM 13.3BRPZ IMPORTSa.RPZ IMPORTSPartial Statement of Cash FlowsFor the Year Ended 31 December 2013Cash flows from investing activities:Purchases of equity securities$(590,000)Proceeds from sales of equity securities (1)$520,000Loans made to borrowers$(400,000)Collections on loans$310,000Cash paid to acquire property, plant and equipment (see part b)$(500,000)Proceeds from sales of property, plant and equipment (2)$310,000Net cash used for investing activities$(350,000)Supporting computations:(1)Proceeds from sales of equity securities:Cost of securities sold (credit entries toEquity Securities account)$600,000Less: Loss on sales of equity securities$80,000Proceeds from sales of equity securities$520,000(2)Proceeds from sales of property, plant and equipment:Cost of property, plant and equipment sold or retired$1,000,000Less: Accumulated depreciation on property, plant andequipment sold or retired$750,000Book value of property, plant and equipment sold or retired$250,000Plus: Gain on sales of property, plant and equipment$60,000Proceeds from sales of property, plant and equipment$310,000b.Schedule of noncash investing and financing activities:Purchases of property, plant and equipment$1,400,000Less: Portion financed through issuance of long-term note payable$900,000Cash paid to acquire property, plant and equipment$500,000c.Management has more control over the timing and amount of outlays for investing activities than for operating activities. Many of the outlays for operating activities are contractual, reflecting payroll agreements, purchase invoices, taxes, and monthly bills. Most investing activities, in contrast, are discretionaryboth as to timing and dollar amount.


P13.4B30 Minutes, MediumPROBLEM 13.4BROYCE INTERIORS CO.a.ROYCE INTERIORS CO.Partial Statement of Cash FlowsFor the Year Ended 31 December 2013Cash flows from operating activities:Cash receipts from customers (1)$2,590,000Interest and dividends received (2)$91,000Cash from operating activities$2,681,000Cash paid to suppliers and employees (3)$(1,576,000)Interest paid (4)$(58,000)Income taxes paid (5)$(112,000)Cash disbursed for operating activities$(1,746,000)Net cash from operating activities$935,000(1)Cash receipts from customers:Net sales$2,600,000Less: Increase in accounts receivable$10,000Cash receipts from customers$2,590,000(2)Interest and dividends received:Dividend income$55,000Interest income$40,000Subtotal$95,000Less: Increase in accrued interest receivable$4,000Interest and dividends received$91,000(3)Cash paid to suppliers and employees:Cash paid to suppliers of goods:Cost of goods sold$1,300,000Add: Increase in inventories$25,000Net purchases$1,325,000Less: Increase in accounts payable to suppliers$5,000Cash paid to suppliers of goods$1,320,000Cash paid for operating expenses:Operating expenses$300,000Less: Depreciation expense$49,000Subtotal$251,000Add: Increase in short-term prepayments$1,000Add: Decrease in accrued operating expenses payable$4,000$256,000Cash paid to suppliers and employees$1,576,000(4)Interest paid:Interest expense$60,000Less: Increase in accrued interest payable$2,000Interest paid$58,000(5)Income taxes paid:Income tax expense$110,000Add: Decrease in accrued income taxes payable$2,000Income taxes paid$112,000Note to instructors: Alternatively, interest and dividends received, and interest paid could be classified as investing cash flows and financing cash flows, respectively.


P13.4B (p.2)PROBLEM 13.4BROYCE INTERIORS CO. (concluded)b.Management could increase cash flows from operations by (only two required):Reducing the amount of inventories being held.Reducing the amount of short-term prepayments of expenses.Taking greater advantage of accounts payable as a short-term means of financing purchases of goods and services.More aggressive collection of accounts receivable.


P13.5B25 Minutes, MediumPROBLEM 13.5BROYCE INTERIORS CO.(INDIRECT)a.ROYCE INTERIORS CO.Partial Statement of Cash FlowsFor the Year Ended 31 December 2013Cash flows from operating activities:Profit$928,000Add:Depreciation expense$49,000Increase in accounts payable to suppliers$5,000Increase in accrued interest payable$2,000$56,000Subtotal$984,000Less:Increase in accounts receivable$10,000Increase in accrued interest receivable$4,000Increase in inventories$25,000Increase in short-term prepayments$1,000Decrease in accrued operating expenses payable$4,000Decrease in accrued income taxes payable$2,000Gain on sales of equity securities$3,000$49,000Net cash from operating activities$935,000Credit sales cause receivables to increase, while collections cause them to decline. If receivables increase over the year, collections during the year must have been less than credit sales for the year. Thus, cash receipts were less than revenue measured on the accrual basis.


P13.6B45 Minutes, StrongPROBLEM 13.6BGOLDEN TECHNOLOGIESa.GOLDEN TECHNOLOGIESStatement of Cash FlowsFor the Year Ended 31 December 2013Cash flows from operating activities:Cash receipts from customers (1)$3,340,000Interest received (2)$65,000Cash from operating activities$3,405,000Cash paid to suppliers and employees (3)$(2,334,000)Interest paid (4)$(23,000)Income taxes paid (5)$(125,000)Cash disbursed for operating activities$(2,482,000)Net cash from operating activities$923,000Cash flows from investing activities:Purchases of equity securities$(50,000)Proceeds from sales of equity securities (6)$65,000Loans made to borrowers$(30,000)Collections on loans$27,000Cash paid to acquire property, plant and equipment$(350,000)Proceeds from sales of property, plant and equipment(7)$22,000Net cash used for investing activities:$(316,000)Cash flows from financing activities:Proceeds from short-term borrowing$56,000Payments to settle short-term debts$(70,000)Proceeds from issuing ordinary shares (8)$160,000Dividends paid$(300,000)Net cash used in financing activities$(154,000)Net increase (decrease) in cash and cash equivalents$453,000Cash and cash equivalents, beginning of year$20,000Cash and cash equivalents, end of year$473,000Supporting computations:(1)Cash receipts from customers:Net sales$3,400,000Less: increase in accounts receivable$60,000Cash receipts from customers$3,340,000(2)Interest received:Interest income$60,000Add: Decrease in accrued interest receivable$5,000Interest received$65,000


P13.6B (p.2)PROBLEM 13.6BFOXBORO TECHNOLOGIES(continued)(3)Cash paid to suppliers and employees:Cash paid for purchases of goods:Cost of goods sold$1,500,000Less: Decrease in inventory$30,000Net purchases$1,470,000Add: Decrease in accounts payable to suppliers$22,000Cash paid for purchases of goods$1,492,000Cash paid for operating expenses:Operating expenses$900,000Less: Depreciation (a noncash expense)$75,000Subtotal$825,000Add: Increase in prepayments$8,000Add: Decrease in accrued liab. for operating expenses$9,000Cash paid for operating expenses$842,000Cash paid to suppliers and employees$2,334,000(4)Interest paid:Interest expense$27,000Less: Increase in accrued interest payable$4,000Interest paid$23,000(5)Income taxes paid:Income tax expense$115,000Add: Decrease in income taxes payable$10,000Income taxes paid$125,000(6)Proceeds from sales of equity securities:Cost of equity securities sold (credit entriesto the Equity Securities account)$40,000Add: Gain reported on sales of equity securities$25,000Proceeds from sales of equity securities$65,000(7)Proceeds from sales of property, plant and equipment:Book value of property, plant and equipment (paragraph 8)$30,000Less: Loss reported on sales of property, plant and equipment$8,000Proceeds from sales of property, plant and equipment$22,000(8)Proceeds from issuing ordinary shares:Amounts credited to Share Capital account$60,000Add: Amounts credited toShare Premium account$100,000Proceeds from issuing ordinary shares$160,000Note to instructors: Alternatively, interest and dividends received, and interest paid could be classified as investing cash flows and financing cash flows, respectively.


P13.6B (p.3)PROBLEM 13.6BFOXBORO TECHNOLOGIES (concluded)b.Cash paid to suppliers, presented in the operating activities section of the statement of cash flows, totaled $2,334,000. Cost of goods sold, presented in the income statement, was only $1,500,000. The primary reasons for the difference are as follows:In addition to cost of goods sold, operating expenses required the payment of a significant amount of cash which accounts for much of the difference.Adjustments to the amount of cost of goods sold plus the amount of operating expenses were required as a result of the following:--Decrease in inventory--Decrease in accounts payable--Depreciation expenses (which did not require cash payment)--Increase in prepaid operating expenses--Decrease in accrued liabilities for operating expensesc.On the contrary, the fact that cash flows from investing and financing activities are negative attests to the strength of the cash position of the company. The amount of cash increased significantly during the year, going from a beginning balance of $20,000 to $473,000. Cash flows from operating activities were a significant positive amount, $923,000. In addition, the company was able to purchase equity securities and PPE assets and make loans to borrowers (all investing activities) and retire debt and pay dividends (financing activities).


P13.7B40 Minutes, StrongPROBLEM 13.7BCONNECTa.CONNECTStatement of Cash FlowsFor the Year Ended 31 December 2013Cash flows from operating activities:Profit$5,620,000Add:Depreciation expense$1,250,000Increase in accounts payable$370,000Subtotal$7,240,000Less:Increase in accounts receivable$8,650,000Decrease in accrued expenses payable$170,000$8,820,000Net cash used in operating activities$(1,580,000)Cash flows from investing activities:Cash paid to acquire property, plants & equipment (see schedule)$(20,000,000)Net cash used in investing activities$(20,000,000)Cash flows from financing activities:Short-term borrowing from bank$14,900,000Issuance of ordinary shares$6,650,000Net cash from financing activities$21,550,000Net increase (decrease) in cash$(30,000)Cash and cash equivalents, 1 January 1, 2013$450,000Cash and cash equivalents 31 Dec. 2013$420,000Supplementary Schedule: Noncash Investing and Financing ActivitiesPurchase of property, plant and quipment$25,850,000Less: Portion financed by issuing long-term notes payable$5,850,000Cash paid to acquire property, plant and equipment$20,000,000


P13.7B(p.2)PROBLEM 13.7BCONNECT (concluded)b.CONNECT's credit sales resulted in $8,650,000 in new receivables, which were uncollected as of year-end. These credit sales all were included in the computation of profit, but those that remained uncollected at year-end do not represent cash receipts. Therefore, the cash flow from operating activities was substantially below the amount of profit measured on the accrual basis.Note to instructor: It is not uncommon for cash flows to lag behind a rising profit figure in a growing business. This is why many rapidly growing businesses find themselves strapped for cash to finance their growth.c.CONNECT does not appear headed for insolvency. First, the company has a $50 million line of credit, against which it has drawn only $14,900,000. This gives the company considerable debt-paying ability. Next, if CONNECT's rapid growth continues, the company should not have difficulty issuing additional ordinaryl shares to investors as a means of raising cash. If a company is obviously successful, it usually is able to raise the cash necessary to finance expanding operations.


P13.8B60 Minutes, StrongPROBLEM 13.8BEXTRA-ORDINAIRE CO.a.EXTRA-ORDINAIRE CO.Worksheet for a Statement of Cash FlowsFor the Year Ended 31 December 2013Balance sheet effects:BeginningDebitCreditEndingBalanceChangesChangesBalanceAssetsCash and cash equivalents$220,000(x)$380,000$600,000Equity securities$270,000(8)$150,000$120,000Accounts receivable$400,000(4)$50,000$350,000Inventory$1,200,000(5)$80,000$1,280,000Property, plant and equipment(net of accumulated depreciation)$2,500,000(9)$200,000(3)$290,000$2,410,000$4,590,000$4,760,000Liabilities & EquityAccounts payable$500,000(6)$200,000$700,000Accrued expenses payable$160,000(7)$20,000$140,000Notes payable$2,350,000(10)$100,000(9)$120,000$2,370,000Share capital$1,080,000(11)$350,000$1,430,000Retained Earnings$500,000(1)$340,000$120,000(2)$40,000Totals$4,590,000$1,160,000$1,160,000$4,760,000Cash effects:SourcesUsesOperating activities:Net loss(1)$340,000Depreciation expense(3)$290,000Decrease in accounts rec.(4)$50,000Increase in inventory(5)$80,000Increase in accounts payable(6)$200,000Decrease in accruedexpenses payable(7)$20,000Loss on sale of equitysecurities(8)$40,000Investing activities:Proceeds from sale ofequity securities(8)$110,000Cash paid for PPE assets(9)$80,000Financing activitiesDividends paid(2)$40,000Payment of notes payable(10)$100,000Issue of share capital(11)$350,000Net increase in cash(x)$380,000Totals$1,040,000$1,040,000


P13.8B(p.2)PROBLEM 13.8BEXTRA-ORDINAIRE CO.(continued)b.EXTRA-ORDINAIRE CO.Statement of Cash FlowsFor the Year Ended 31 December 2013Cash flows from operating activities:Net loss$(340,000)Add:Depreciation expense$290,000Decrease in accounts receivable$50,000Increase in accounts payable$200,000Loss on sales of equity securities$40,000Subtotal$240,000Less:Increase in inventory$80,000Decrease in accrued expenses$20,000$100,000Net cash from operating activities$140,000Cash flows from investing activities:Proceeds from sales of equity securities$110,000Cash paid to acquire PPE assets (see supplementary schedule)$(80,000)Net cash from investing activities$30,000Cash flows from financing activities:Dividends paid$(40,000)Payment of note payable$(100,000)issuance of share capital$350,000Net cash from financing activities$210,000Net increase (decrease) in cash$380,000Cash and cash equivalents, 1 January 2010$220,000Cash and cash equivalents, 31 Dec. 2010$600,000Supplementary Schedule: Noncash Investing and Financing ActivitiesPurchase of PPE assets$200,000Less: Portion financed through issuance of long-term debt$120,000Cash paid to acquire PPE assets$80,000


P13.8B(p.3)PROBLEM 13.8BEXTRA-ORDINAIRE CO. (continued)c.Extra-Ordinaire Co. achieved its positive cash flow from operating activities basicallyby liquidating assets and by not paying its bills. It has converted most of its accountsreceivable into cash, which probably means that credit sales have declinedsubstantially over the past several months. A decrease in sales shows up in theincome statement immediately, but may take months before its effects appear in astatement of cash flows.Extra-Ordinaire Co. is not replacing PPE assets as quickly as these assets are being depreciated. In any given year, this may not be significant. But on the other hand, this relationship certainly indicates that the business is not expanding, and it may indicate that the company is deferring replacements of PPE assets in an effort to conservecash.Extra-Ordinaire Co. is allowing its accounts payable to rise much more quickly than it is increasing inventory. This indicates that the company is not paying its bills as quickly as it used to. While this conserves cash, the savings are temporary. Also, if the companys credit rating is damaged, this strategy may reduce both earnings and cash flows in the near future.d.Extra-Ordinaire Co. has substantially more cash than it did a year ago. Nonetheless, the companys financial position appears to be deteriorating. Its equity securitiesa highly liquid assetare almost gone. Its accounts payable are rising rapidly, and substantially exceed the amount of cash on hand. Most importantly, sales and accounts receivable both are falling, which impairs the companys ability to generate cash from operating activities in the future. Also, the liquidity of the companys inventory is questionable in light of the declining sales.e.This company is contracting its operations (or collapsing). Its investment in equity securities, receivables, and PPE assets all are declining. Further, the income statement shows that operations are eroding the owners equity in the business. The decline in salesalready apparent in the income statementsoon will reduce the cash collected from customers, which is the principal factor contributing to a positive cash flow from operating activities.In summary, this company appears to be in real trouble.f.The companys principal revenue sourcesales of Pulsasappears to be collapsing. If nothing is done, it is likely that the annual net losses will increase, and that operating cash flows soon will turn negative. Thus, managements first decision is whether to attempt to revive the company, or liquidate it.If the company is to be liquidated, this should be done quickly to avoid future operating losses. Information should be gathered to determine whether it would be best to sell the company as a going concern or whether management should sell the assets individually. In either event, management should stop purchasing Pulsas. Assuming that sales continue to decline, the companys current inventory appears to be approximately a one-year supply.


P13.8B(p.4)PROBLEM 13.8BEXTRA-ORDINAIRE CO. (concluded)If management decides to continue business operations, it should take the following actions:Expand the companys product lines! The Pulsas alone can no longer support profitable operations. Also, dependency upon a single productespecially a faddish product with a limited market potentialis not a sound long-term strategy.Stop buying Pulsasat least until the current inventory is sold. This will not improve profitability, but will help cash flows. (As explained above, the companys current inventory appears about equal to next years potential sales.)Look for ways to reduce operating expenses. In 2009, sales declined by 36%, but the company was able to reduce operating expenses by only about 3.8% ($100,000 decline from a level of $2,600,000).Stop paying dividends. The company has no cash to spare. As sales continue to fall,the net cash flow from operating activities is likely to turn negative. Collectingexisting receivables and letting payables go unpaid can only bolster net cash flow for a limited period of time.Develop forecasts of future operations and cash flows. If a turnaround does not appear realistic, management should reconsider the option of liquidating the company.s


Case 13.1SOLUTIONS TO CASES25 Minutes, StrongCASE 13.1ANOTHER LOOK AT ALLISON COMPANYa.Based on past performance, it does not appear that Allison Company can continue topay annual dividends of $40,000 without straining the cash position of the company. In atypical year, Allison generates a positive cash flow from operating activities ofapproximately $50,000. However, about $45,000 is required in a normal year to replacethe property, plant and equipment retired. This leaves only about $5,000 per year of the net operating cash flow available for dividends and other purposes. If Allison is to continue paying cash dividends of $40,000 per year, the company must raise about $35,000 from investing and financing activities.Over the long run, it is quite difficult for a company to continually finance its cashdividends through increased borrowing (financing activity) or through sales of assets(investing activity). Therefore, Allison Company may have to reduce its cash dividends in future years.b.Two of the unusual factors appearing in the current statement of cash flows should beconsidered in assessing the companys ability to pay future dividends. First, the companyspent an unusually large amount ($160,000) to purchase property, plant and equipment during the year. This expenditure for property, plant and equipment may increase net operating cash flow above the levels of prior years. Second, the company issued $100,000 of bonds payable and an additional 1,000 shares. The interest on the new bonds payable will reduce future cash flows from operations. Also, the additional shares capital mean that total dividend payments must be increased if the company is to maintain the current level of dividends per share.In summary, the unusual investing and financing activities will improve the companys ability to continue its dividends only if the new property, plant and equipment generate more cash than is needed to meet the increased interest and dividend requirements.


Case 13.215 Minutes, EasyCASE 13.2CASH BUDGETING FOR YOU AS A STUDENTa.Ending cash balances:Week 2: $200 [$(200) + $1000 - $300 - $200 - $100]Week 3: $600 ($200 + $1000 - $300 - $200 - $100)Week 4: $1000 ($600 + $1000 - $300 - $200 - $100)b.In Week 1 you have two problems. The first is that you do not have enough cash to pay your rent on Wednesday. But you will by Friday, so your payment may be a couple of days late. (But whats going to happen next month? Is there some handwriting on the wall?)Your second problem is that if you spend in your normal pattern, you will overdraw your bank account by $200 (which may trigger a service charge of another $100 or more). This problem can be solved by your foregoing any expenditures on entertainment this weekannoying, but hardly a cash crisis.You have a bigger problem coming up in February. You will have more difficulty payingFebruarys rent than you did Januarys. The sad fact is that you cannot afford rent of$2,000 per month. You are earning $4,000 per month and spending $2,400 on things other than rent. Thus, you can afford only about $1,600 per month for rent unless you reduce other expenses.To solve this problem, you might find another roommate to share the rent, move into less expensive housing, or somehow increase your monthly cash receipts. (It does not appear practical to trim $400 per month from your other expenses.)


Case 13.345 Minutes, MediumCASE 13.3LOOKIN' GOOD?a.Net Cash fromProposalsProfit for the periodOperating ActivitiesCash(1)IncreaseNo effectNo effect(2)IncreaseNo effectNo effect(3)IncreaseIncreaseIncrease(4)No effectIncreaseIncrease(or decrease)*(or decrease)*(or decrease)*(5)DecreaseIncreaseIncrease(6)IncreaseIncreaseIncrease(7)No effectNo effectIncrease*Either no effect or decrease is an acceptable answer to the probable effect of this proposal upon profit for the period; see discussion in paragraph (4), part b.b.(1)If the costs of producing inventory are rising, use of the FIFO (first-in, first-out) method assigns older and lower costs to the cost of goods sold. Thus, it results in higher reported profits for the period (but also in higher income taxes) than does the weighted average cost method. The inventory method used by a company does not affect the price that it pays to suppliers to purchase inventory. Thus, other than for possible tax consequences, the choice of inventory method does not affect cash flows. (The case stated that the additional taxes stemming from use of the FIFO method would not be paid until the following year.)(2)Changing from an accelerated method to the straight-line method of depreciation will (generally) reduce the amount of depreciation expense included in the income statement, thus increasing reported profit. Lengthening estimates of useful lives has a similar effect. Depreciation is a noncash expense; therefore, cash flows are not affected by the choice of depreciation method or the estimate of useful lives, except to the extent that these choices may affect income tax payments. The problem stated, however, that no changes would be made in the depreciation claimed for tax purposes.(3)Pressuring dealers (customers) to increase their inventories will increase General Wheels sales for the year. This should increase profit for the period and cash flows from operating activities (collections from customers).(4)Requiring dealers to pay more quickly will speed up cash collections from customers, thus increasing operating cash flows and total cash. The timing of these collections has no direct effect upon profit. However, offering shorter credit terms may have the indirect effect of reducing net sales. Thus, one might argue that this proposal could decrease both profit for the period and future collections from customers.


Case 13.3 (p.2)CASE 13.3LOOKIN' GOOD? (concluded)(5)Passing up cash discounts will delay many cash outlays by about 20 days. In the long run the amount paid will be about 2% greater, but in the short run the delay should more than offset these increased costs. (A 20-day delay in cash outlays usually amounts to over 5% of total cash outlays for the year: 20 days/365 days = 5.5%.) While operating cash flows will increase, profit will decline; the higher purchase costs will be reflected in the cost of goods sold.(6)Incurring short-term interest charges of 10% to replace long-term interest charges of 13% will reduce interest expense and cash payments of interest. Therefore, profit, cash flows from operating activities, and total cash flow will improve. Managements only risks in pursuing this proposal are that short-term rates may rise or that the company may be unable to renew the short-term loans as they mature.(7)Dividend payments do not enter into the determination of profit or net cash from operating activities. Therefore, these two amounts will not be affected by the proposal. Cash dividends are classified as financing activities and do not affect total cash flows from operating activities. Therefore, replacing cash dividends with stock dividends (which require no cash payment) will increase net cash flow from all sources. However, management should be aware that discontinuing cash dividends may adversely affect the companys ability to raise capital through the issuance of additional ordinary shares.


Case 13.415 Minutes, EasyCASE 13.4PEAK PRICINGa.The statement is not valid because it addresses only the peak-period aspect of a peak-pricing strategy. It is true that during the peak period, some customers will be priced out of the market (or at least encou

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