Chapter 5 · Web viewThe statement of cash flow reports cash flows for operating, investing, and financing activities. The SCF’s primary function is to disclose historical cash

Chapter 5: The Statement of Cash Flow

Suggested TimeCase 5-1 HUM Products Limited

5-2 Women’s Hockey Power5-3 Barnard Developments Limited

Assignment 5-1 Statement of cash flow — item analysis.......... 155-2 Calculate cash flow.......................................... 105-3 Calculate cash flow.......................................... 105-4 Statement of cash flow classification............... 155-5 Statement of cash flow, operating activities.... 155-6 Statement of cash flow, indirect

method—individual transactions................. 105-7 Prepare a statement of cash flow (*W)............ 255-8 Cash flow categories – basic analysis (*W)... . 255-9 Statement of cash flow, indirect method.......... 255-10 SCF and capital assets...................................... 255-11 SCF and account changes................................ 205-12 Prepare a statement of cash flow..................... 305-13 Prepare a statement of cash flow..................... 305-14 Prepare a statement of cash flow..................... 305-15 Prepare a statement of cash flow..................... 305-16 Optional presentation alternatives, direct method 305-17 Optional presentation alternatives,

indirect method ............................................. 305-18 Prepare a statement of cash flow,

indirect method (*W)....................................... 305-19 Partial statement of cash flow; missing data.... 405-20 Partial statement of cash flow; missing data.... 405-21 Partial statement of cash flow; missing data.... 355-22 Statement of cash flow; indirect method......... 305-23 Prepare a statement of cash flow..................... 305-24 Statement of cash flow, indirect and direct

method (optional spreadsheet)..................... 605-25 Statement of cash flow, indirect method

(optional spreadsheet)................................ 605-26 Statement of cash flow..................................... 605-27 Prepare a statement of cash flow..................... 405-28 Statement of cash flow, direct method............. 405-29 Statement of cash flow, indirect method (*W) 355-30 Integrative problem, chapters 1-5.................... 75

©2011 McGraw-Hill Ryerson Ltd. All rights reservedSolutions Manual to accompany Intermediate Accounting, Volume 1, 5th edition 5-1

*W The solution to this exercise/problem is on the text Web site and in the Study Guide. This solution is marked WEB.

©2011 McGraw-Hill Ryerson Ltd. All rights reserved Solutions Manual to accompany Intermediate Accounting, Volume 1,

5th edition5-2

Questions

1. The purpose of the statement of financial position is to report the financial position (i.e., assets, liabilities, and owners' equity) as of the end of the reporting period. The purpose of the statement of comprehensive income is to report the results of operations (i.e., revenues, expenses, gains and losses) for the reporting period. It is a change statement because it reports the detailed items that comprise comprehensive income, which includes both net earnings and unrealized amounts. These items cause owners' equity (retained earnings and other reserves) to change. These statements report accrual-basis amounts. The SCF focuses on cash flow only. The statement of cash flow reports cash flows for operating, investing, and financing activities. The SCF’s primary function is to disclose historical cash flows of the enterprise.

2. This company had accrual-based revenues of $260,000, and a cash inflow of $220,000 ($100,000 + $40,000 + $80,000). The cash basis is reflected on the SCF, either directly or indirectly.

3. Cash includes cash on hand, plus cash in the current (bank) account. Cash also includes cash equivalents, which are highly liquid short-term investments (original term less than three months). Bank overdrafts are included as a (negative) component of cash, as long as the balance fluctuates duriung the year. Disclosure of the cash definition is important to inform readers exactly which items have been lumped together as “cash”.

4. Operating activities – cash flow related to principal revenue-producing activities of the enterprise and the related expenditures.Investing activities - cash flows related to the asset structure of the company.Financing activities - cash flows related to liabilities and owners’ equity.

Inflows Outflows5. Operating 1. Cash sales 1. Payments to suppliers

2. Cash from customers on account2. Payments for salaries and wages3. Advance deposits from 3. Payments for rent

customers

Investing 1. Cash received from sale of 1. Purchase of equipment equipment 2. Purchase of debt or equity

2. Cash received from sale of debt securities of others or equity investments 3. Loans to others

3. Cash received from collection of loan principal

Financing 1. Cash received from borrowing 1. Payment of loans (principal)via bank loans 2. Retirement of bonds payable

2. Cash received from issuing (principal)bonds payable 3. Cash paid to retire common shares


3. Cash received from sale of common shares

6. Operating activities Less: gain on sale of capital asset........................................ ($26,000)

Investing activities Sale of capital asset.............................................................. $216,000

7. An adjustment must be made for depreciation because it is a non-cash expense originally treated as a deduction to compute net earnings. Under the indirect method, these items must be added to net earnings to cancel or remove their effect.

8. The difference between the direct and indirect methods relates only to the operating activities section of the SCF. The direct method reports individual cash inflows from each major revenue and individual cash outflows for each major expense. The indirect method reports a reconciliation of net earnings with net cash flow from operating activities. This reconciliation reports non-cash items and changes in asset and liability accounts directly related to net earnings.

Illustration:Direct Method:

Cash inflow from sales (i.e., from customers) etc........... $703,000

Indirect Method:Net earnings..................................................................... $116,000Reconciliation

Accounts receivable increase ..................................... ($47,000)

9. The direct method might be preferable to the indirect method of disclosing cash flows in the operating section because:

- presentation is simpler in relation to interest, dividends and tax.- no additions or deductionsare needed for non-cash expenses or working capital.

This makes the statement easier to understand.The indirect method is prevalent in practice, probably due to historical development.

10. The two-step method to disclose cash flow from operations involves grouping the various adjustments needed to convert net earnings into cash flow from operating activities. In the first group, non-cash charges (or credits) and non-operating elements are added (subtracted) from income. The second group includes all changes to the other working capital accounts related to revenues and expenses. This allows meaningful subtotals and groupings to take place.

11. Offsetting involves showing cash inflows and outflows net. It is not acceptable presentation on the SCF. In the example provided, it is not acceptable to present only the $7,000 increase in bank debt in the financing section of the SCF.


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The required presentation is to show, in financing activities, a loan repayment as an outflow of cash of $75,000, and borrowing under the new loan as a cash inflow of $82,000.

12. A non-cash investing and/or financing event might be

° acquiring fixed assets in exchange for long-term debt° acquiring land for common shares° paying a stock dividend with a company’s own common shares.

Such items have no effect on cash balances and are excluded from the SCF. They must be disclosed.

13. Operating activitiesNet earnings ...................................................................$150Plus:Tax expense........................................................................40

$190 Tax paid ($40 - $6)..........................................................(34 ) Cash from operating activties.......................................$156This presentation alternative is also available for dividends received, interest received

and interest paid.

14. Income tax is disclosed in the operating activities section of the SCF, unless it is caused by a capital transaction, like a dividend, in which case it would be classified with the dividend. Classification of income tax is factual, based on the underlying transaction. Dividends paid may be classified in the financing activities section, or in the operating section. Similarly, interest paid is included in operating activities or in financing. Dividends received and interest received may be classified in operating activities or in investing activities. Decisions about the judgemental classifications (all the above except income tax) are the responsibility of management. Such decisions are reviewed by the auditors.

15. The SCF would show, as an inflow, $350,000 for the initial borrowing transaction in the financing section of the SCF. When the loan is repaid, the SCF will show a financing outflow of $350,000 to repay principal, and an outflow of $50,000 for interest, either in operating or financing, at the company’s choice.

16. Earnings quality is higher if cash flow from operating activities is consistently correlated to earnings. In the prior year, cash flow from operating activities was $30,000 higher than earnings. Therefore, the earnings quality is higher in the current year if cash from operating activities is ($75,000), because this is $25,000 ‘better’ than the reported loss of $100,000. Historical trend would have to be analyzed before a definite answer could be provided.


17. Developing Ltd. would report the $46,700 spent in operating activities in the year of the expenditure if it were expensed immediately. It would be reported in investing activities if it were capitalized.

18. The gain on sale of cash equivalent temporary investments would not appear as a reconciling item in operating activities on an indirect-method SCF because the gain would properly reflect the impact of the transaction on net cash. That is, if $10,000 of marketable securities were sold for $12,000, 'cash' increases by a net amount of $2,000, the amount of the gain.

19. Types of adjustments common in the reconciliation of net earnings to cash flow from operating activities using the indirect method are,

1. Adjustments to reverse cost/revenue allocations (e.g., add back depreciation).2. Reversals of accruals of revenue and expense (e.g., changes in accounts

receivable and payable).3. Reclassification of items that relate to investing or financing activities (e.g., gains

and losses on sale of capital assets reversed out; proceeds reported in appropriate section).

4. Add-back of expenses, or deduction of revenues because the cash flows associated with these elements are shown as a separate line item (eg, tax, interest)

20. ASPE is different than IFRS as follows (per the chapter):

a. Dividends paid must be classified as a financing activity.b. Interest received and paid, and dividends received must be classified in

operating activities. There is no choice of alternate classification.c. Information regarding cash flow for interest, and cash paid for income tax,

is required but accomplished through a disclosure note.


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Cases

Case 5-1HUM Products Ltd.

Overview

HUM Products Limited (HUM) is a consumer products company that design, manufactures and markets branded products. The company is public and complies with IFRS. Various alternatives for SCF presentation are being considered; the users would be investors and their advisors. Lenders are also important, given the level of debt on the statement of financial position. One assumes that stable and improving metrics are desirable, as is readily understandable information. Issues

1. Presentation of the SCF using the direct versus indirect methods in operating activities

2. Interpretation of SCF results3. Classification of interest and dividends paid4. Classification of development costs

Analysis

1. Presentation of the SCF using the direct versus indirect methods in operating activities

The 20X4 SCF using the indirect method is shown in Exhibit 1, and using the direct method, in Exhibit 2. The investing and financing sections are identical for the two methods, and the amount of cash used in operations is identical, at $17,100. However, the presentation of operating cash flows is different in the indirect versus the direct methods. The direct method lists cash from customers, and cash paid for various purposes. It may be easier to interpret. This presentation alternative is not common in Canada to date, but is popular in other countries that comply with IFRS.

Outstanding questions for review with the CFO:1. The SCF has been prepared assuming no sales of property, plant and equipment or

intangibles. That is, the change in these accounts was assumed to be depreciation/amortization and acquisitions.

2. All transactions were assumed to be cash transactions – that is, there were no non-cash exchanges.

3. The accounts that did not change (goodwill and common shares) were assumed to be dormant during the period.

4. Another assumption was that long-term debt was not repaid and re-issued; that is, that the net increase to long-term debt was the only thing that affected this account (repayments have to be separately reported)


2. Interpretation of SCF results

In 20X4, the company reported $96.5 million in net earnings, but used $17.1 million in operating activities. There was a large build-up in inventory ($186.1) and a more modest build-up in accounts receivable ($29.4). Accounts payable increased, as one would expect when inventory increases, but the $55 increase in accounts payable is far less than the inventory build-up. The overall result is negative cash flow from operating activities.The company invested significantly in plant assets ($55.2) and intangible assets ($102.9) during the year. They paid out $60 million in dividends to shareholders. Their major source of financing was an increase in long-term debt ($287.8). While there was a decrease in the current portion of long-term debt ($54.1), the overall increase in long-term debt provided the funds for capital assets, increases in inventory and accounts receivable, and dividend payments.

The risk profile of the company has increased over the year, as indicated by the inventory build-up and increased debt.

3. Classification of interest and dividends paid

Interest and dividends may be classified as either an operating or a financing activity. In the SCF in Exhibits 1 and 2, dividends are a financing activity and interest is an operating activity. This is consistent with the view that interest is a cost of doing business, and dividends are a return of capital.

If both payments are viewed as claims paid to stakeholders that provide external financing, then dividends could be classified as an operating activity. This alternative is shown in Exhibit 4 using the direct presentation for operating activities. If the indirect method were used, the end result would be identical, but the initial part of the operating activities section would be shown as a reconciliation, per exhibit 1. As one would expect, with the reclassification, cash for operating activities declines by $60 million payment for dividends and cash provided by financing improves by $60 million.

If both payments are considered to be amounts paid for financing, and the operating activities section is meant to show the core cash flows from operating independent of financing, then interest and dividends can be presented in financing activities. This is demonstrated in Exhibit 3 using the direct presentation for operating activities. With the reclassification, operating cash flows improves to $4.1, while financing cash flows now show the $60 million paid for dividends and the $21.2 paid for interest.


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The issues that must be considered when evaluating the possibilities are;1. Are the payments for interest and dividends conceptually a cost of doing business

(operating) or a return because of financing?2. How well will lenders and investors understand the presentation, and how can they

be educated to help them understand the presentation, and3. What will HUM’s competitors do, because comparisons are more complicated

when presentation is different between companies that are benchmarked against each other.

4. Classification of development costs

HUM’s current policy of expensing development costs as incurred means that they report lower (worse) cashflows from operating activities, and lower cash outflows (better) from investing activities. The amount for this year is $10.9. Since cash flow used for operating activities is (17.1), under the initial classification of interest and dividends, a change of $10.9 is material.

If, on the other hand, the amounts were capitalized and deferred, the cash ouflow would be shown in investing activities. Amortization woud be deducted from net earnings, and then added back on the SCF. Accordingly, the cash outflow would be permanently removed from operating activities, just as the cash outfow for capital assets is never a factor in cash from operating activities.

Since the expenditures are reasonably stable, the level of amortization in any year would be roughly equivalent to the annual expenditures and there would be no change to net earnings.

In relation to the SCF, the company must decide which classification better represents the nature of these expenditures – are they an operating or investing decision? Since they are regular annual amounts, operating activities seems logical. On the other hand, branding and intangibles are a key element in the identity of HUM, so this decision should be carefully examined. Just like the decision regarding interest and dividend classification, one factor is how understandable this information will be to the users of financial information. Users must be knowledgeable and understand the inter-connected elements in the SCF.

The “capitalization/amortization versus expense” decision is not based on the SCF impact. There are criteria in the accounting standards that dictate whether such expenditures qualify for deferral. These criteria attempt to ensure that only expenditures that meet the asset definition qualify for deferral. This decision should be revisited in the light of those criteria.


Exhibit 1HUM Products LimitedIndirect method of presentation, operating activities

HUM Products LimitedStatement of Cash Flow

For the year ended 31 December 20x4

Operating activities:Net earnings............................................................................. $96,500Plus:

Depreciation expense................................................... 35,800Amortization expense.................................................. 10,400Interest expense............................................................ 21,200Income tax expense...................................................... 19,100

183,000Plus/minus changes in related working capital accounts

Increase in accounts receivable.................................... (29,400)Increase in inventory.................................................... (186,100)Increase in prepaid expenses........................................ (5,700)Increase in accounts payable........................................ 55,000Decrease in pension liability........................................ (800)

Cash paid for interest..................................................................... (21,200)Cash paid for income tax ($19,100 - $2,100 - $5,100).................. (11,900 ) Net cash for operations.................................................................. $(17,100)

Financing activities:Bank loan repayment............................................................... (1,400)Current portion of long-term debt decrease............................. (54,100)Increase in long-term debt....................................................... 287,800Cash paid for dividends........................................................... ( 60,000)

Net cash from financing................................................................. 172,300

Investing activities:Purchase of plant assets........................................................... (55,200)Purchase of intangible assets................................................... (102,900 )

Net cash for investing.................................................................... ( 158,100)Change in cash............................................................................... (2,900)Opening cash and cash equivalents................................................ 22,500Closing cash and cash equivalents................................................. $ 19,600


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Exhibit 2HUM Products LimitedDirect method of presentation, operating activities



Operating activities:Cash received from customers ($2,164,800 - $29,400)........... $2,135,400Cash paid to suppliers ($1,651,100 + $319,100 + $800+

$186,100 + $5,700 - $55,000).............................. (2,107,800)Cash paid for development...................................................... (10,900)Cash paid for restructuring costs.............................................. (700)Cash paid for interest............................................................... (21,200)Cash paid for tax ($19,100 - $5,100 - $2,100)......................... (11,900 )

Net cash for operations.................................................................. $(17,100)

Financing activities:Bank loan repayment............................................................... (1,400)Current portion of long-term debt decrease............................. (54,100)Increase in long-term debt....................................................... 287,800Cash paid for dividends........................................................... ( 60,000)





Exhibit 3HUM Products LimitedDirect method of presentation, operating activitiesClassification of interest and dividends in financing activities




$186,100 + $5,700 - $55,000).............................. (2,107,800)Cash paid for development...................................................... (10,900)Cash paid for restructuring costs.............................................. (700)Cash paid for tax ($19,100 - $5,100 - $2,100)......................... (11,900 )

Net cash from operations............................................................... $4,100

Financing activities:Bank loan repayment............................................................... (1,400)Current portion of long-term debt decrease............................. (54,100)Increase in long-term debt....................................................... 287,800Cash paid for interest............................................................... (21,200)Cash paid for dividends........................................................... ( 60,000)





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Exhibit 4HUM Products LimitedDirect method of presentation, operating activitiesClassification of interest and dividends in operating activities




$186,100 + $5,700 - $55,000).............................. (2,107,800)Cash paid for development...................................................... (10,900)Cash paid for restructuring costs.............................................. (700)Cash paid for tax ($19,100 - $5,100 - $2,100)......................... (11,900)Cash paid for interest............................................................... (21,200)Cash paid for dividends........................................................... (60,000 )

Net cash for operations.................................................................. $(77,100)

Financing activities:Bank loan repayment............................................................... (1,400)Current portion of long-term debt decrease............................. (54,100)Increase in long-term debt....................................................... 287,800Net cash from financing........................................................... 232,300




Case 5-2Women’s Hockey Power

Overview

Women’s Hockey Power (WHP) is a company with significant debt financing, both from the bank and from related parties. Lenders would view this as a high-risk operation. The users of these financial statements are shareholders and especially lenders. There is a lending covenant that states that the debt-to-equity ratio cannot exceed 6-to-1, and compliance must be monitored. Lenders require GAAP-compliant financial statements. The debt covenant is now in violation, and there is no available cash to meet obligations as they come due. This is an urgent management issue, which must be quickly addressed or the company will not be able to continue.

WHP is privately owned and thus is permitted to follow ASPE. The company would like to go public in the future, which means that any policies chosen under the umbrella of ASPE would have to be changed to IFRS on a retrospective basis. Since WHP is still a very small company, with an uncertain future, a public offering is not a “given.” Picking onerous accounting policies now would seem inappropriate, and retrospective restatement would be possible once a public offering seems imminent. Therefore, ASPE should be seriously considered.

WHP might be motivated to overstate income and assets, and understate liabilities, both to support eventually going public and to encourage the lenders. This would be unethical. In addition, the bookkeeper is entitled to a bonus based on earnings over $50,000, providing the accountant with an incentive to overstate income and assets, but the company itself may be biased to minimize this bonus. The statements would also be used for tax purposes, and minimization of taxable income would be a natural bias from this perspective.

The company is owned by Dana Samuels and three other minority shareholders. There are related party transactions, which increases the risk that the financial statements are not reliable.

Issues1. Correction of financial statements: interest accrual, unearned revenue, bonus,

income tax2. Depreciation policy3. Revenue recognition4. Accounting for investment5. Income tax accounting6. Related party transactions7. Statement of cash flow8. Solvency and debt covenants9. Issues re: going public


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Analysis

1. Correction of financial statements: interest accrual, unearned revenue, income tax

The following adjustments have been processed through the revised financial statements; entries are shown in exhibit 3. The revised financial statements are shown in exhibit 1.

a. Hockey clinic revenue was clearly earned when the clinics were presented in December of 20X5 and thus may be recognized. Expenses are assumed to be already included in earnings.

b. Interest expense is significantly understated and has been recalculated to include three sources of interest-bearing debt. Interest payable has accordingly increased.

c. The accountant’s bonus has been accrued.d. Revised earnings has resulted in a revised measure of income tax expense,

assumed to be 30% of earnings.

2. Depreciation policy

In this, the first year of operations, WHP has recorded $106,700 of depreciation on capital assets, which is 22% ($106,700/$480,000) of the asset cost. This seems high, expecially since the assets were acquired mid-year. Also, the company’s financial statements are not excessively healthy, the method (straight-line versus declining balance, etc) and assumptions (useful life or percentage used, salvage value) should be re-examined. If they are reasonable, then no change should be made. If they are unreasonable, then depreciation should be revised. Since no information was presented regarding these assets, no change has been made but the amounts are material to the financial position of the company. Revised depreciation will not provide any additional cash, however.

3. Revenue recognition

No revenue has been recognized for the order from Point Shot. Revenue is normally recognized on delivery, and delivery of this order has been delayed until the 20X7 fiscal year. One could argue that revenue should be recognized, since collection would not seem to be an issue (the transaction is with a minority shareholder), the product has already been manufactured, delivery was delayed at the request of the customer, and the completed inventory could be separated from regular inventory awaiting delivery. If this were viewed as justifying revenue recognition, WHP would have to consistently follow this policy for such delayed orders.

On the other hand, one can argue that since delivery is not complete, there should be no revenue recognition. Early revenue recognition would speed bonus and tax payments, which is not desirable. There are still risks in the process - for example,


the order could be cancelled (even though it is with a related party), or the sticks could prove defective.

Because of the risks, and because WHP is a new company without an established operating history, revenue is not recognized until delivery.

(If students conclude that early revenue recognition is warranted, a receivable for $40,000 should be accrued, inventory should be reduced by $15,000, with the difference representing gross profit. Additional tax and bonus should be recognized.)

Note that this is a related party transaction and as such will have to be disclosed as such in the 20X7 financial statements. It is valued at the exchange amount, which at least internally should be evaluated in relation to fair market value.

4. Accounting for investment

Since WHP owns all the shares in Deek, they must consolidate at year-end to be in compliance with GAAP under IFRS. Consolidation involves adding together the financial statements of the investee to those of the investor, line-by-line. The equity accounts of the investee are eliminated, as is the investment account on the books of the investor. If fair values of net assets are different from book values on the date of acquisition, as one would expect, fair values are recognized and subsequently amortized. Goodwill is recognized to the extent of any excess of any price paid over fair value. Goodwill is subsequently evaluated for impairment. Inter-company transactions and unrealized inter-company gains or losses are eliminated. For the year just ended, income would increase by $40,000, less any depreciations or eliminations.

If WHP decides to apply ASPE, they may use the cost method or the equity method for this investment. The cost method would only recognize income when there are dividends declared, and there seem to be none this year. This method is simple, but ignores the income earned by Deek, which may be a material part of the financial results of WHP. If the equity method were used, a one-line investment revenue item is used to capture the earnings of the investee, after all eliminations. For this year, this would be $40,000, less any depreciation and eliminations. This revenue would increase the carrying value of the investment, while dividends declared would reduce the investment. This would also increase the bonus recorded, not desirable for WHP, but increase equity, which would improve the debt ratio.

For WHP, the cost method would be the most simple, but omits some critical information from the financial statements. The equity method is the next most simple; it increases bonus and earnings. Consolidation is the most complex, ties in to the accounting required of public companies, and includes the most information for financial statement readers.


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Between cost and equity, the equity method seems to give better information, and also requires that all information needed for eventual consolidation to be gathered. Since no information about fair values or inter-company transactions was provided, and the equity method would increase the bonus payable, this report leaves the investment at the cost method.

(Students may choose to accrue the $40,000 investment revenue this year, to adjust to an approximation of the equity method)

5. Income tax accounting

In these financial statements, income tax payable has been assumed to be a constant percentage of income. No deferred income tax has been established. Under ASPE, WHP may choose to use the taxes payable method. As before, this would mean adjustment at such time as a public offering is imminent. In the meantime, the simplicity of the taxes payable method is preferred. For simplicity, this report also assumes that there are no permanent differences between accounting and taxable income.

6. Related party transactions

Both the acquisition of equipment for $480,000 and the eventual revenue from Point Shot are transactions with minority shareholders and thus valuation is an issue. The presence and extent of these transactions has to be disclosed in financial statements. The method of their valuation (at the exchange amount, at fair market value, etc.) must be disclosed. The presence of material inter-company transactions means that the financial statements are viewed as less reliable from the perspective of outside users, so if fair market value has indeed been the valuation or pricing mechanism, this should be carefully established and disclosed.

7. Statement of cash flow

A SCF is required as part of the financial statements The SCF based on the revised statement of financial position is shown in exhibit 2. Note the cash flows for interest have been included in operating activties, and separate listing of cash outflows for interest and income tax is on the face of the SCF. Other alternatives are acceptable.

The SCF highlights the looming cash crisis in the company, as cash from operations is negative.

8. Solvency, cash flow and debt covenants

WHP is required to keep its debt-to-equity ratio at less than 6-to-1. In the revised financial statements, this ratio is 6.83 ($741,171/$108,449). WHP management and


shareholders need to meet with lenders on a timely basis to review the ramifications of this violation, and look at solutions.

Cash flow projections from the coming year should be prepared, and the viability of the company reviewed and solidified with this information in place.

The company currently has a bank overdraft of $7,000. There are many current obligations in the coming year - interest, tax, bonus, a large installment on the 7% note payable, along with an installment on the bank debt. It is not clear that WHP will be able to meet these obligations.

A number of solutions should be explored:1. Rapid collection of the $226,300 of accounts receivable would allow

payment of current obligations.2. Additional support from trade creditors would allow additional financial

flexibility – the inventory balance of $150,020 is presumably mostly paid for, since the accounts payable are only $12,000.

3. It would be worth contacting the related party that extended the $480,000 note payable for the equipment to see if some of this could be converted to equity or if payment terms could be extended. This is urgent, since the $120,000 installment due this year will be especially problematic.

4. Additional investment may be possible from the existing shareholders.

9. Issues re: going public

As previously stated, WHP is likely some years, and a big improvement in financial stability, away from a viable public offering. At that time, IFRS would be adopted and accounting policies such as investment accounting and income tax accounting would have to be brought into line. The more that is compliant on a year-by-year basis, the less needs to be later adjusted.

Disclosure is a substantive issue for all companies, but especially public companies. WHP should have appropriate disclosures now for

Related party transactions Non-monetary transactions, and Financial instruments (debt)

Conclusions

Various items were completed and journalized in the financial statements to allow the preparation of revised financial statements, and a statement of cash flow. The company is in violation of a debt covenant and appears to be headed for a cash crisis. Both these issues must be substantively addressed. After these issues are dealt with, accounting policies such as accounting for investments and appropriate disclosures should be considered. A public offering, while an interesting goal, is not likely in the short term.


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Exhibit 1

Women’s Hockey Power Ltd.Statement of Financial Position(draft)31 January 20X6

Accounts receivable $ 226,300Inventory 150,020Investment in Deek Inc. 100,000Equipment 480,000Accumulated depreciation (106,700)Total Assets $849,620

Bank overdraft $ 7,000Accounts payable 12,000Wages and bonus payable 10,865Interest payable 17,950Income taxes payable 38,356Unearned revenue NilNote payable, 9% 100,000Note payable, 7%, four payments of $120,000 due starting 31 May 20X6. Interest payable annually on 31 May 480,000Loan payable, 8% to Regal Bank 75,000Common shares 5,000Retained earnings 103,449Total liabilities and shareholders' equity $849,620

Women’s Hockey Power Ltd.Selected Earnings Information(draft)For the Year Ended 31 January 20X6

Selected accounts and balances include:Interest expense $ 30,650

Income before income tax (1) $147,785Income tax expense (30%) 44,336

Net earnings and comprehensive income$

103,449

(1) $141,600 + $35,000 - $17,950 - $10,865


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Exhibit 2

Women’s Hockey Power Ltd.Statement of Cash Flow

Year ended 31 January 20X6

Cash flows for operating activities:

Earnings................................................................................................$103,449Adjustments for non-cash items:

Depreciation expense........................................................................ 106,700Interest expense................................................................................ 30,650Income tax expense.......................................................................... 44,336

285,138Changes in net working capital:

Increase in accounts receivable........................................................ (226,300)Increase in inventories...................................................................... (150,020)Increase in accounts payable............................................................ 12,000Increase in bonus payable................................................................. 10,865Increase in interest payable............................................................... 17,950Increase in tax payable..................................................................... 38,356

Cash paid for interest ($30,650 - $17,950)........................................... (12,700)Cash paid for income tax ($44,336 - $38,356)..................................... (5,980 ) Net cash flows for operating activties................................................... $(87,000)

Cash flows from financing activities:Borrowing from bank....................................................................... 75,000Cash from issuance of common shares............................................. 5,000

Net cash flows from financing.............................................................. 80,000Net decrease in cash.............................................................................. (7,000)Cash balance 1 February ...................................................................... 0Cash balance 31 January....................................................................... $(7,000 )

Required disclosures of non-cash transactions (supplementary disclosure)Investment in Deek for long-term notePurchase of equipment for long-term note payable.

©2011 McGraw-Hill Ryerson Ltd. All rights reserved5-22 Solutions Manual to accompany Intermediate Accounting, Volume 1, 5th edition

Exhibit 3WHPJournal entries

Unearned revenue............................................................................. 35,000Revenue ..................................................................................... 35,000

Interest expense ............................................................................... 17,950Interest payable........................................................................... 17,950

Interest expense: ($100,000 x 9% x 5/12) + ($480,000 x 7% x 8/12) + ($75,000 x 8% x 9/12) = $30,650 versus $12,700 now = $17,950

Compensation expense .................................................................... 10,865Bonus payable ........................................................................... 10,865

(($141,600 + $35,000 – $17,950) - $50,000) x 10% = $10,865

Tax expense ..................................................................................... 1,856Tax payable................................................................................ 1,856

($141,600 + $35,000 – $17,950 - $10,865) x 30% = $44,336 versus $42,480 now

© 2011 McGraw-Hill Ryerson Ltd. All rights reservedSolutions Manual to accompany Intermediate Accounting, Volume 1, 5th edition 5-23

Case 5-3Barnard Developments Ltd

Overview

Barnard Developments Ltd (BDL) is a public company reporting operating losses while they build up their customer base in a high fixed-cost industry. They report positive cash flow from operations, since depreciation is added back, but their expenditures for capital assets, needed to operate, are significant. Management has considerable incentive to choose reporting practices that attempt to maximize cash flow from operations, maximize assets, and minimize reported losses.

Issue

Analyze the company’s reporting policies that permit capitalization of equipment subsidies as customer lists; this asset is amortized over twenty-four months.

Analysis and conclusions

Customers are given hardware converters and the like to bring them into contracts. The cost of this equipment could be reported as an expense in the year the equipment is delivered. Instead, the cost is deferred and written off over a (very short) twenty-four month amortization period. The future revenue from customers is the cash inflow that justifies the asset classification. The customer exists, and has been signed to a rental arrangement. Furthermore, this activity is likely in the core business and the longetivity of customers is a matter of historical record.

Customer lists are an internally developed intangible asset. Standards in the area must be reviewed and satisfied if amounts are to be capitalized. Here, the product is defined and the costs appear to be known. Creation of the asset through a contractual right (the customer contract) and probable future revenue are the issues that must be addressed (Note that this material is the subject of later text discussion and may not be cited by the student at this point.)

The current policy likely suits BDL’s reporting incentives to maximize assets and minimize reported losses, because the expense is deferred. It is noted, though, that the amortization period is very short (twenty-four months). One could argue that the ten-year average life span of a customer could be used. However, predicting the life of a customer in some areas might be difficult, as track records may not specifically apply.

The policy has the effect of excluding these expenditures from operating activities of the SCF. The outflow is shown in the investing section, and subsequent amortization, while a reduction of net earnings, is added back in operating activities on the SCF.


If BDL followed the policy of expensing these costs as incurred, they would report lower (worse) cash inflows from operating activities, and lower cash outflows (better) from investing activities (see Appendix 1)

BDL can likely justify these accounting principles, based on their track record of attracting and retaining customers. It is understood that this reporting policy suits the reporting objectives of the company. However, the policy is aggressive, and financial statement users must understand the impact on income and cash flows. This is the key – users must be knowedgeable and understand the inter-connected elements in the SCF.

Appendix 1BDLRevised cash flowCash flows if costs were expensed rather than deferred and amortized:

Cash flow from operating activities (previously reported)...................$335,400Plus: Amortization expense eliminated from net earnings (earnings is higher) (2)...................................................................... 153,631 Less: amortization add-back now not needed....................................... (153,631)Less: Cash paid for additions to customer lists..................................... (127,142 ) Revised cash from operating activities................................................$208,258

Cash inflows (outflows) from investing activities:Cash flow for investing (previously reported)...............................($825,100)Less: increase in customer lists (1)................................................ 127,142

Revised cash outflow for investing activities.......................................($697,958 )

(1) Additions to deferred charges during 20x2: $127,142 = $418,742- $291,600(2) Amortization of deferred amounts during 20x2: $153,631 = $270,908 - $117,277


Assignments

Assignment 5-1

Requirements 1 and 2

a) Investing activities - cash paid for capital asset......................................... (18,000)b) Financing activities - borrowed money....................................................... 46,000c) None; non-cash transactiond) Financing activities - repaid note payable................................................... (200,000)

Cash flow for interest ($7,800) should be represented by interest expense and is separately disclosed as a cash outflow as part of operating activties, unless the company has decided it is a financing flow.

e) Operating activities - decrease in wages payable........................................ (8,000)f) Operating activities - decrease in accounts receivable................................ $76,000g) Financing activities - paid dividend............................................................ (97,000)

Note: this cash outflow may also be classified in operating activtiies if the company wishes.

h) Operating activities - add back depreciation............................................... 67,000i) Operating activities - deduct gain on sale................................................... (3,000)

Investing activities - sold capital asset....................................................... 13,000

Requirement 3

a) Investing activities - cash paid for capital asset (no change from above).. (18,000)b) Financing activities - borrowed money (no change from above)................ 46,000c) None; non-cash transaction (no change from above)d) Financing activities - repaid note payable (no change from above)............ (200,000)

Operating activities - paid interest (may also be in financing activities if the company chooses)......................................................................... (7,800)

e) Operating activities - cash paid to employees............................................. (243,000)f) Operating activities - collected cash from customers..................................1,071,000 g) Financing activities - paid dividend (no change from above)..................... (97,000)h) None – excluded from SCFi) No disclosure of gain - excluded from SCF

Investing activities - sold capital asset (no change from above)................ 13,000


Assignment 5-2

Cash flowCase A ($26,400) Expense

(3,900) Interest payable decrease 2,200 bond discount amortization $ (28,100)

Case B $125,700 Revenue (72,100) Interest receivable increase $ 53,600

Case C $794,300 Revenue (15,600) Accounts receivable increase (12,000) Unearned revenue decreased $ 766,700

Assignment 5-3

Cash flowCase A $893,500 Revenue

40,100 Accounts receivable decrease 15,200 Unearned revenue increased $ 948,800

Case B $(307,000) Cost of goods sold (14,300) Accounts payable decrease 17,600 Inventory decrease

$ (303,700)

Case C ($50,700) Expense 5,500 Deferred tax increased (21,700) Income tax payable decreased $ (66,900)


Assignment 5-4

1. D (A or C when paid)2. C3. D4. C 5. B Loss is reconciling item, add-back in A 6. B7. D Cash equivalent, included in the cash amount at the bottom of the SCF8. C9. D No cash changes hands10. B11. A Reconciling item, deduction12. A Reconciling item, add-back 13. C and D C for 90% cash portion; 10% remainder is D because it is a non-cash

transaction14. A and D Loss is reconciling item, add-back in A. Proceeds are D because not yet

paid. 15. A Reconciling item, deduction


Assignment 5-5

Requirement 1WINDSOR COMPANYStatement of Cash Flow

Year ended ...Operating activities

Net earnings............................................................................$ 420,000Adjustments for items not requiring cash:

Depreciation expense, buildings and equipment....................90,000Amortization of trademarks....................................................25,000Deferred income tax................................................................16,000

551,000Changes in current assets and current liabilities: Decrease in trade accounts reveivable................................... 31,000 Decrease in interest payable..................................................(18,000) Increase in accounts payable.................................................. 20,000 Increase in merchandise inventory...................................... (60,000 )

Cash from operating activities........................................................$524,000

Requirement 2WINDSOR COMPANYStatement of Cash Flow

Year ended ...Operating activities

Net earnings............................................................................$ 420,000Adjustments for items not requiring cash:

Depreciation expense, buildings and equipment....................90,000Amortization of trademarks....................................................25,000Interest expense.......................................................................80,000Income tax expense...............................................................140,000

755,000Changes in current assets and current liabilities: Decrease in trade accounts reveivable................................... 31,000 Increase in accounts payable.................................................. 20,000 Increase in merchandise inventory...................................... (60,000 )

746,000Cash paid for interest ($80,000 + $18,000).................................(98,000)Cash paid for income tax ($140,000 - $16,000)........................(124,000 )

Cash from operating activities........................................................$524,000


Assignment 5-6

a) Investing – purchase of investment............................................ $ (98,500)

b) Financing – repayment of loan principal.................................... (56,000)Operating – payment of interest................................................. (44,000)Note: each of the last five years, in operating activties, interest would have been a non-cash expense, and added back because a liability would be increased for accrued interest. In this year, the liability for accrued interest is paid off and eliminated. This reduction in accrued interest payable is an operating activity adjustment, a reduction in cash from operating activties.

c) Operating - Increase in accounts payable................................... 20,000

d) Operating - deduct gain on sale.................................................. (30,000)Investing - proceeds on sale of land........................................... 82,000

e) No disclosure on the SCF; non-cash transaction

f) Operating - add loss on sale........................................................ 21,000Investing - proceeds on sale of machinery................................. 14,000


Assignment 5-7 (WEB)

RANGLER PAPER COMPANYStatement of Cash Flow

Year Ended 31 December 20x5(in ‘000’s)

Net cash inflows (outflows) from operating activities:Net earnings.......................................................................................... $103Adjustments

Depreciation................................................................................... 20Net increase in working capital..................................................... ( 3)*

Net cash inflow (outflow) from operating activities............................. $120

Cash inflows (outflows) from investing activities:Cash invested in restricted construction fund................................ (60)Disposal of operational asset for cash (at book value).................. 12

Net cash inflow (outflow) from investing activities............................. (48)

Cash inflows (outflows) from financing activities:Paid cash dividend......................................................................... (10)Borrowed on long-term note.......................................................... 25Payment of bonds payable............................................................. (97)

Net cash inflow (outflow) from financing activities............................. (82)Net increase (decrease) in cash............................................................. (10)Beginning cash balance, 1 January 20x5.............................................. 62Ending cash balance, 31 December 20x5............................................. $52

*Changes in current items:

Assets LiabilitiesIncrease in Inventory........ $-14 Increase in Accounts payable. $+5Increase in Prepaids......... -3Decrease in Receivables. . +7Decrease in Rent receivable +2

Net........................................... $-8Overall (-8 + (+5))................ $-3



Note: The assignment asks only for the total cash flow from each category, so a formal statement and/or appropriate presentation of operating activities is not required.

DENTON CORPORATIONStatement of Cash Flow


Operations:Net earnings............................................................................. $690,000Less: Increase in inventory.................................................... (80,000)

Gain on sale of long-term investment.......................... ( 35,000)Plus: Depreciation expense*................................................. 250,000

Amortization of patent................................................. 10,000Increase in accounts payable........................................ 105,000

Net cash from operations......................................................... $940,000

Financing activities:Bank loan................................................................................. 325,000Proceeds on issuance of shares................................................ 220,000Dividends................................................................................. ( 240,000)


Investing activities:Proceeds on sale of long-term investment............................... 135,000Proceeds on sale of equipment................................................. 150,000Purchase of plant assets**....................................................... (1,100,000)

Net cash for investing.................................................................... ( 815,000)Change in cash............................................................................... 430,000Opening cash ($100 + $0).............................................................. 100,000Closing cash ($230 + $300)........................................................... $ 530,000

Assumed: short-term bank debt is not an overdraft and thus is not included in the cash definition.

* Accumulated Depreciation 20x5.............................................. $450,000Accumulated depreciation on equipment sold......................... + 250,000Less: Accunulated depreciation 20x4...................................... - 450,000Depreciation expense............................................................... $ 250,000

** Equipment 20x5....................................................................... $1,700,000Cost of equipment sold............................................................ 400,000Less: equipment 20x4.............................................................. - 1,000,000

Purchase of equipment............................................................. $1,100,000


Assignment 5-9

Requirement 1

HKL COMPANYStatement of Cash Flow

Year ended 31 December 20x8

Operating activities Net earnings ..............................................................................(18)

$ 1,000

Adjustments for non-cash items: Depreciation 10,000 Loss on sale of capital assets .................................................(1

2,000

Changes in current assets and current liabilities: Increase in accounts receivable .............................................(18)

(3,000)

Increase in inventory .............................................................(18)

(5,000)

Decrease in prepaid insurance ...............................................(18)

1,000

Increase in accounts payable .................................................(18)

3,000

Decrease in wages payable ...................................................(18)

(3,000)

Increase in rent payable ................................................ends paid(18)

6,000

Net cash provided by operations $ 12,000

Investing activities Sale of equipment (NBV of $6,000; loss of $2,000)................(18)

4,000

Purchase of land ........................................................................(18)

(20,000) (16,000)

Financing activities Issued long-term note .......................................................ends paid(18)

10,000

Issued common shares ......................................................ends paid(18)

22,000

Cash dividends paid ($24,000 + $1,000 vs. $23,000)................(18)

(2,000) 30,000

Net increase (decrease) in cash 26,000Cash balance, beginning of the year .............................................(18)

35,000

Cash balance, end of the year ........................................................ $ 61,000


(18)


Requirement 2

HKL COMPANYStatement of Cash Flow


Operating activities Net earnings ..............................................................................(18)

$ 1,000

Adjustments : Depreciation 10,000 Loss on sale of capital assets..................................................(1

2,000

Interest expense .............................................……….. 2,000 Income tax expense 3,000 Changes in current assets and current liabilities: Increase in accounts receivable .............................................(18)

(3,000)

Increase in inventory .............................................................(18)

(5,000)

Decrease in prepaid insurance ...............................................(18)

1,000

Increase in accounts payable .................................................(18)

3,000

Decrease in wages payable ...................................................(18)

(3,000)

Increase in rent payable ................................................ends paid(18)

6,000

Cash paid for interest .....................................……….. (2,000) Cash paid for income tax (3,000)Net cash provided by operations $ 12,000

Investing activities Sale of equipment (NBV of $6,000; loss of $2,000)................(18)

4,000

Purchase of land ........................................................................(18)

(20,000) (16,000)

Financing activities Issued long-term note .......................................................ends paid(18)

10,000

Issued common shares ......................................................ends paid(18)

22,000

Cash dividends paid ($24,000 + $1,000 vs. $23,000)................(18)

(2,000) 30,000

Net increase (decrease) in cash 26,000Cash balance, beginning of the year ............................................. 35,000


(18)Cash balance, end of the year ........................................................(18)

$ 61,000

Note: Idential to prior solution except as bolded.


Assignment 5-10

Case A 20x2Operating activities Deduct: gain on sale of capital asset $ (2,000) Add back: Depreciation expense ($ 70,000 opening balance, less $30,000 acc’d depreciation on asset sold ($40,000 Cost - $10,000 NBV) = $40,000Actual balance, $60,000, therefore depreciation expense was $20,000)

20,000

Investing activities Cash on sale of capital asset ($10,000 NBV sold at a gain of $2,000)

12,000

Purchase of capital assets ($ 160,000 opening balance, less $40,000 cost of asset sold = $120,000 Actual balance, $180,000, therefore asset purchased was $60,000)

(60,000)

Entries (not required) Depreciation expense ........................................... 20,000

Accumulated depreciation........................... 20,000

Cash........................................................................ 12,000 Accumulated depreciation……………………….. 30,000

Capital asset................................................. 40,000Gain on sale………………………………. 2,000

Capital assets............................................................ 60,000Cash…………............................................... 60,000


Case B 20x2Operating activities Add back: loss on sale of capital asset $ 4,000 Add back: Depreciation expense 25,000

Investing activities Cash on sale of capital asset(NBV = $60,000 less accumulated dep’n of $45,000 = $15,000 NBV; sold at a loss of $4,000) Acc’d dep’n: ($ 190,000 opening balance, plus $25,000 dep’n expense = $215,000 Actual balance, $170,000, therefore acc’d depreciation written off was $45,000)

11,000

Purchase of capital assets ($ 320,000 opening balance, less $60,000 cost of asset sold = $260,000 Actual balance, $330,000, therefore asset purchased was $70,000)

(70,000)



Cash........................................................................ 11,000 Accumulated depreciation……………………….. 45,000 Loss on sale……………………………………… 4,000

Capital asset................................................. 60,000

Capital assets............................................................ 70,000Cash………….............................................. 70,000


Case C 20x2Operating activities Deduct: gain on sale of capital asset $ (17,000) Add back: Depreciation expense ($ 110,000 opening balance, less $26,000 acc’d depreciation on asset sold ($80,000 Cost - $54,000 NBV) = $84,000Actual balance, $160,000, therefore depreciation expense was $76,000

76,000

Investing activities Cash on sale of capital asset ($54,000 NBV sold at a gain of $17,000)

71,000

Purchase of capital assets ($ 290,000 opening balance, less $80,000 cost of asset sold , plus $200,000 non-cash acquisition = $410,000 Actual balance, $600,000, therefore asset purchased was $190,000.)

(190,000)



Cash........................................................................ 71,000 Accumulated depreciation……………………….. 26,000

Capital asset................................................. 80,000Gain on sale………………………………. 17,000

Capital assets............................................................ 200,000Long-term debt…………............................. 200,000

Capital assets............................................................ 190,000Cash…………............................................... 190,000


Assignment 5-11

Case A 20x2Operating activities Net earnings $278,000

Financing activities Paid cash dividend $542,000 + $278,000 - $154,000 stock dividend = $666,000 versus $658,000

(8,000)

Case B 20x2Operating activities Add back: loss on sale of capital asset $ 15,000 Add back: Depreciation expense 125,000

Investing activities Cash on sale of capital asset(NBV = $122,000 less accumulated dep’n of $90,000 = $32,000 NBV sold at a loss of $15,000) Acc’d dep’n: ($ 210,000 opening balance, plus $125,000 dep’n expense) = $335,000 Actual balance, $245,000, therefore acc’d depreciation written off was $90,000)

17,000

Purchase of capital assets ($ 560,000 opening balance, less $122,000 cost of asset sold = $438,000. Actual balance, $620,000, therefore asset purchased was $182,000)

(182,000)


Accumulated depreciation.......................... 125,000

Cash........................................................................ 17,000 Accumulated depreciation……………………….. 90,000 Loss on sale……………………………………… 15,000

Capital asset................................................. 122,000

Capital assets............................................................ 182,000Cash………….............................................. 182,000


Case C 20x2

Operating activities Add back: loss on bond retirement $ 3,500

Financing activities Bond retirement $ (103,500) Issuance of bond payable $250,000 - $100,000 retired + $150,000 non-cash transaction = $300,000 versus $600,000 actual balance

300,000

Investing activities Cash paid for plant asset, cash portion of transaction (25,000)


Assignment 5-12

Requirement 1 FALLON SALES LIMITED

Cash Flow StatementYear ended 31 December 20x5

Operating activities:Net earnings...................................................................................... $ 16,900Adjustments for non-cash items:

Depreciation................................................................................. 14,000Goodwill impairment................................................................... 38,700Loss on sale of investments......................................................... 6,000 75,600

Changes in net working capital:Increase in accounts receivable.................................................... (12,500)Increase in inventory.................................................................... 48,600Increase in prepaid insurance....................................................... (200)Decrease in accounts payable...................................................... (13,000)Increase in rent payable............................................................... 4,500Decrease in income tax payable................................................... (1,600)Increase in pension obligation..................................................... 1,700

Net cash flows from operations............................................................ $ 103,100Investing activities:

Sold long-term investment ($20,000 change in account at a loss of $6,000).................. 14,000

Purchased capital asset (1)......................................................... (24,000)Cash from investing............................................................. (10,000)

Financing activities:Dividends paid ($53,000 + $16,900 = $69,900 versus $57,900) (12,000)Issued common shares ($270,000 + $28,000 = $298,000 versus $324,000).................................................................. 26,000Bonds payable retired................................................................. (110,000)

Cash used for financing........................................................ (96,000 ) Net decrease in cash during the year................................................ (2,900)Cash balance, beginning of the year................................................. 20,000Cash balance, end of the year........................................................... $17,100(1) $240,000 – $14,000 + $28,000 = $254,000 versus $278,000

Requirement 2

The company had modest earnings for the year, at $16,900. However, there was a large cash flow from operations at $103,100. This difference is explained by the presence of a non-cash impairment of goodwill in earnings, and by the fact that there was a significant reduction in inventory over the period. Cash was used to pay $12,000 in dividends, and purchase $24,000 of capital assets, but more significantly repay $110,000 of bond liability.


Assignment 5-13

Requirement 1 Norton Corp

Statement of Cash FlowFor the year ended 31 December 20x2

Operations:Net earnings............................................................................. $140,700Plus: Depreciation expense................................................... 168,000

Gain on sale of equipment........................................... (7,200)Loss on sale of investment........................................... 2,000 . 303,500Decrease in accounts receivable.................................. 43,200Increase in inventory.................................................... (24,000)Increase in accounts payable........................................ 19,200Decrease in income tax payable................................... (12,000 )


Financing activities:Issued bond.............................................................................. 100,000Dividends paid......................................................................... ( 61,900)


Investing activities:Proceeds on sale of investment ($142,000 - $80,000 - $2,000) 60,000Proceeds on sale of equipment *.............................................. 74,200Purchase of equipment ............................................................ (259,000)

Net cash for investing.................................................................... ( 124,800)Change in cash............................................................................... 243,200Opening cash ................................................................................. 30,600Closing cash .................................................................................. $ 273,800

* NBV = $187,000 - $120,000** = $67,000; $67,000 + $7,200 gain = $74,200** Accumulated depreciation = $384,000 + $168,000 = $552,000 vs. $432,000; $120,000 eliminated

Requirement 2

Earnings of $140,700 provided significantly higher cash flow of $329,900 from operating activties. This was because of the $168,000 add-back for depreciation coupled with relatively minor swings in working capital amounts. Of these, the largest was a $43,200 increase in accounts receivable. The company raised $100,000 by issuing a bond during the year, and spent $259,000 on new capital assets. They also raised some money by selling capital assets and an investment. Dividends of $61,900 were paid out.


Assignment 5-14

Requirement 1 YIU LTDStatement of Cash Flow


Operating activities:Net earnings............................................................................. $102,000Plus: Depreciation expense................................................... 43,000

Gain on sale of machinery........................................... (9,000)Gain on bond retirement.............................................. (4,000 ) . 132,000Decrease in accounts receivable.................................. 15,900Increase in prepaid rent................................................ (1,400)Decrease in accounts payable...................................... (8,600)Decrease in unearned revenue..................................... (50,300 )


Financing activities:Decrease in bank loan.............................................................. (127,800)Proceeds on issuance of shares................................................ 251,000Repaid bond............................................................................. (56,000)Dividends paid ($166,000 + $102,000 - $30,000

= $238,000 versus $202,000........................................ ( 36,000)Net cash from financing................................................................. 31,200

Investing activities:Purchased long-term investment.............................................. (86,000)Proceeds on sale of machinery ($9,000 + NBV of $27,100

($60,000 – $32,900)........................................................... 36,100Purchase of machinery ($751,000 - $60,000 = $691,300 versus $762,800)............................................. (71,500)

Net cash for investing.................................................................... ( 121,400)Change in cash............................................................................... (2,600)Opening cash ($42,200 - $24,000)................................................. 18,200Closing cash .................................................................................. $ 15,600

Requirement 2

Earnings of $102,000 provided $87,600 of cash from operating activities. A large decline in unearned revenue meant that less cash from operating activties was produced than earnings, despite the add-back of $43,000 for depreciation. Common shares were issued for $251,000, and debt was repaid: there was a large $127,800 decline in the bank loan and $56,000 was spent to repay bonds. Dividends of $36,000 were paid. Money was spent to acquire a long-term investment ($86,000) and capital assets ($71,500) while other assets were sold for $36,100.


Assignment 5-15

JUNE LTDStatement of Cash Flow


Operating activities:Net earnings............................................................................. $223,000Plus: Depreciation expense ($241,000 – $70,000 on asset sold

= $171,000 versus $276,500)...................................... 105,500Gain on sale of capital assets....................................... (36,000 ) . 292,500Increase in accounts receivable.................................... (95,600)Increase in inventory.................................................... (45,400)Decrease in accounts payable...................................... (17,000 )


Financing activities:Proceeds on issuance of shares................................................ 55,000Repayment of bond payable ($275,000 + $150,000

+ $40,000 = $465,000 versus $405,000)..................... (60,000)Proceeds on issuance of preferred shares

($150,000 - $40,000 = $110,000 versus $160,000)......... 50,000Dividends paid......................................................................... ( 75,000)

Net cash for financing.................................................................... (30,000)

Investing activities:Proceeds on sale of capital assets ($20,000 + $36,000)........... 56,000Purchase of capital assets ($675,500 - $90,000 sold +

$150,000 for bond = $735,500 vesus $875,200)............ (139,700)Net cash for investing.................................................................... ( 83,700)Change in cash............................................................................... 20,800Opening cash ($54,400 - $10,000)................................................. 44,400Closing cash ($97,200 - $32,000).................................................. $ 65,200


Assignment 5-16

Requirement 1

Interest paid may be classified as a financing activity and interest received may be classified as an investing activity. The SCF in the question classifies both these amounts in operating activities. Dividends paid to shareholders, now in financing, may be classified in operating activities.

Income tax may be in another category if triggered by a specific capital transaction but this is not a management decision.

Requirement 2

MACLAREN SUPPLIES LIMITEDStatement of Cash Flow

Year ended 31 December 20x5Operating Activities

Cash received from customers .................................................. $406,600Cash paid for operating expenses .............................................. (306,300)Cash paid for income tax ........................................................... (20,200 )

Cash generated from operating............................................ $80,100Investing activities:

Investment income received.................................................... 4,900Sold long-term investment......................................................... 36,000Purchased capital assets............................................................. (28,400)

Cash from investing............................................................. 12,500Financing activities:

Dividends paid............................................................................ (20,000)Interest paid.............................................................................. (7,700)Bonds payable retired................................................................. (60,000)

Cash used for financing........................................................ (87,700)Net increase in cash during the year................................................. 4,900Cash balance, beginning of the year................................................. 16,000Cash balance, end of the year........................................................... $20,900

Note: Bolded items have been reclassified.


Requirement 3MACLAREN SUPPLIES LIMITED

Statement of Cash FlowYear ended 31 December 20x5

Operating ActivitiesCash received from customers .................................................. $406,600Cash paid for operating expenses .............................................. (306,300)Cash paid for interest............................................................... (7,700)Cash paid for income tax ........................................................... (20,200)Cash received for investment income..................................... 4,900Cash paid for dividends........................................................... (20,000 )

Cash generated from operating............................................ $57,300Investing activities:

Sold long-term investment......................................................... 36,000Purchased capital assets............................................................. (28,400)


Bonds payable retired................................................................. (60,000)Cash used for financing........................................................ (60,000)

Net increase in cash during the year................................................. 4,900Cash balance, beginning of the year................................................. 16,000Cash balance, end of the year........................................................... $20,900


Requirement 4

The SCF presented in either requirement 2 or requirement 3 may be more informative to financial statement users, depending on the circumstances. In requirement 3, payments to shareholders in the form of dividends are included in operating activities, giving dividends, like interest, status as a payment made to the stakeholders who provide capital. Cash from operating activities therefore is more complete. In requirement 2, the operating activities section provides more insight as to cash flow generated or used in strictly operating activities, excluding payments for financing or investment revenues.


Assignment 5-17

Requirement 1

Interest paid may be classified as a financing activity and dividends received may be classified as an investing activity. The SCF in the question classifies both these amounts in operating activities. The SCF also shows dividends paid to shareholders as a financing activity; this cash flow may be classified in operating activities.Income tax may be in another category if triggered by a specific capital transaction but this is not a management decision.

Requirement 2

WAVE ELECTRONICS LIMITEDStatement of Cash Flow


Net earnings...................................................................................... $ 28,200Adjustments:

Depreciation and amortization..................................................... 14,200Income tax expense...................................................................... 16,000Interest expense............................................................................ 23,500Dividend revenue......................................................................... (6,800)Gain on sale of investment........................................................... (10,000 ) 65,100

Changes in net working capital:Decrease in accounts receivable.................................................. 7,500Decrease in inventory.................................................................. 18,400

Cash paid for income tax.................................................................. (11,100 ) Net cash flows from operating.............................................................. $ 79,900Investing activities:

Dividend revenue received ...................................................... 5,600Sold long-term investment......................................................... 45,000Purchased capital assets............................................................. (138,400)

Cash for investing................................................................. (87,800)Financing activities:

Dividends paid............................................................................ (20,000)Interest paid.............................................................................. (24,000)Bonds payable issued................................................................. 60,000

Cash from financing............................................................. 16,000Net increase in cash during the year................................................. 8,100Cash balance, beginning of the year................................................. (1,300 ) Cash balance, end of the year........................................................... $6,800



Requirement 3

WAVE ELECTRONICS LIMITEDStatement of Cash Flow


Net earnings...................................................................................... $ 28,200Adjustments:

Depreciation and amortization..................................................... 14,200Income tax expense...................................................................... 16,000Interest expense............................................................................ 23,500Dividend revenue......................................................................... (6,800)Gain on sale of investments......................................................... (10,000 ) 65,100

Changes in net working capital:Decrease in accounts receivable.................................................. 7,500Decrease in inventory.................................................................. 18,400

Cash paid for interest....................................................................... (24,000) Cash paid for dividends.................................................................... (20,000) Cash paid for income tax.................................................................... (11,100) Cash received for dividend revenue................................................ 5,600Net cash flows from operations............................................................ $ 41,500

Investing activities:Sold long-term investment......................................................... 45,000Purchased capital assets............................................................. (138,400)

Cash from investing............................................................. (93,400)Financing activities:

Bonds payable issued................................................................. 60,000Cash from financing............................................................. 60,000

Net increase in cash during the year................................................. 8,100Cash balance, beginning of the year................................................. (1,300 ) Cash balance, end of the year........................................................... $6,800


Requirement 4

The SCF presented in either requirement 2 or requirement 3 may be more informative to financial statement users, depending on the circumstances. In requirement 3, payments to shareholders in the form of dividends are included in operating activities, giving dividends, like interest, status as a payment made to the stakeholders who provide capital. Cash from operating activities therefore is more complete. In requirement 2, the operating activities section provides more insight as to cash flow generated or used in strictly operating activities, excluding payments for financing or investment revenues.



Requirement 1

BXX Products LimitiedStatement of Cash Flow


Cash flows from operating activities:

Net earnings..........................................................................................$128,000Adjustments for non-cash items:

Depreciation expense........................................................................ 24,000Loss on sale of capital assets............................................................ 2,000


Increase in accounts receivable........................................................ (15,000)Decrease in inventories..................................................................... 7,000Increase in accounts payable............................................................ 14,000Increase in wages payable................................................................ 8,000Decrease in tax payable.................................................................... (5,000 )

Net cash flows from operating.............................................................. $163,000

Cash flows used for investing activities:Sale of capital assets......................................................................... 15,000Purchase of capital assets................................................................. (125,000)Purchase of land................................................................................ (45,000)

Net cash flows used for investing......................................................... (155,000)

Cash flows used for financing activities:Borrowing on long-term mortgage................................................... 30,000Cash from issuance of common shares............................................. 50,000Payments on long-term debt............................................................. (54,000)Dividends paid.................................................................................. (36,000 )

Net cash flows used for financing......................................................... (10,000)Net decrease in cash.............................................................................. (2,000)Cash balance 1 January ........................................................................ 43,000Cash balance 31 December (to balance)............................................... $41,000


Requirement 2

BXX Products LimitiedStatement of Cash Flow


Cash flows from operating activities:

Net earnings..........................................................................................$128,000Adjustments:

Depreciation expense........................................................................ 24,000Loss on sale of capital assets............................................................ 2,000Income tax expense.......................................................................... 17,000Interest expense................................................................................ 4,000


Increase in accounts receivable........................................................ (15,000)Decrease in inventories..................................................................... 7,000Increase in accounts payable............................................................ 14,000Increase in wages payable................................................................ 8,000

Cash paid for income tax ($17,000 + $5,000)...................................... (22,000 ) Net cash flows from operating.............................................................. $167,000

Cash flows used for investing activities:Sale of capital assets......................................................................... 15,000Purchase of capital assets................................................................. (125,000)Purchase of land................................................................................ (45,000)


Cash flows used for financing activities:Borrowing on long-term mortgage................................................... 30,000Cash from issuance of common shares............................................. 50,000Payments on long-term debt............................................................. (54,000)Dividends paid.................................................................................. (36,000)Interest paid...................................................................................... (4,000 )

Net cash flows used for financing......................................................... (14,000)Net decrease in cash.............................................................................. (2,000)Cash balance 1 January ........................................................................ 43,000Cash balance 31 December (to balance)............................................... $41,000


Assignment 5-19

Smith and Co. LtdPartial Statement of Cash Flow


Operations:Net earnings............................................................................. $148,500Plus: Depreciation expense................................................... 45,000

Interest expense............................................................ 6,000Loss on sale ................................................................. 15,000Gain on sale.................................................................. (4,500 ) $210,000Less: Increase in inventory.......................................... (14,000 ) $196,000

Financing activities:Proceeds on issuance of shares................................................ 50,000Repaid note payable................................................................. (20,000)Interest paid.............................................................................. (6,000)Dividends paid ($306 + $148.5 - $25) vs $352....................... ( 77,500 )

(53,500)

Investing activities:Purchased equipment............................................................... (140,000)Proceeds on sale of equipment (1)........................................... 15,500Proceeds on sale of land ($50 - $15)........................................ 35,000 (89,500)

(1) $316 + $45 = $361 vs. $322; $39 of depreciation eliminated NBV = $50 - $39 = $11 plus gain of $4.5 = proceeds


Assignment 5-20

Sternhill Ltd.Partial Statement of Cash Flow

For the year ended 31 December 20X4

Operating activities:Net earnings ($356.9 - $50 - $70 = $236.9 vs $467.5)............ $230,600Plus: Depreciation expense (1)............................................. 132,300

Loss on sale ................................................................. 2,100......................................................................................

Financing activities:Proceeds on issuance of common shares ($500 + $50) vs $780 230,000Retired preferred shares........................................................... (100,000)Retired bonds ($200 +$150 = $350 vs $300).......................... (50,000)Cash dividends paid................................................................. ( 70,000)

Investing activities:Proceeds on sale of machinery (2)........................................... 54,100Purchase of machinery (3)....................................................... (320,200)

(1) ($97.3 - $56.2 = $41.1 eliminated on sale; $123.6 - $41.1 = $82.5 vs $214.8 = $132.3(2) NBV of $56.2 sold at a loss of $2.1(3) $344.9 - $97.3 = $247.6 vs $567.8 = $320.2


Assignment 5-21

Requirement 1Plaskett Ltd.

Partial Statement of Cash Flowfor year ended 31 December 20X4

Operating activities:Net earnings................................................................................ $215,300Plus/minus not-cash items

Depreciation expense........................................................... 167,400Loss on sale of capital assets................................................ 6,500 389,200

Changes in working capitalDecrease in accounts receivable........................................... 8,500Decrease in tax payable........................................................ (13,600)Increase in inventory............................................................ (9,400)Increase in accounts payable................................................ 13,000

Cash from operating activities.......................................................... $387,700

Investing activities:Sale of capital assets (1)............................................................. 16,700Purchase of capital assets (2)..................................................... (211,000 )

Cash used for investing activities..................................................... (194,300)

Note: Temporary investments are part of cash.

(1) Accumulated depreciation = $398,000 + $167,400 = $565,400 vs $468,600 actual = $96,800 written off on sale.Cost of $120,000, accumulated depreciation of $96,800 = book value of $23,200. If the asset was sold at a loss of $6,500, proceeds were $16,700 ($23,200 - $6,500).

(2) Capital assets = $680,000 - $120,000 + $150,000 = $710,000 vs $921,000 actual = $211,000.

Requirement 2

Dividends calculated through retained earnings:Retained earnings: $96,000 + $215,300 – $44,000 = $267,300 vs $133,000 = $134,300


Assignment 5-22

Requirement 1CARAMONT LIMITEDStatement of Cash Flow

for the year ended 31 December 20x9Operating activities:

Net earnings................................................................................ $161,000Plus (less):

Depreciation......................................................................... 72,000Interest expense.................................................................... 16,800Income tax expense.............................................................. 98,000Loss on sale of operating assets........................................... 12,000Gain on sale of investments................................................. ( 39,000) 320,800

Plus (less) changes in working capitalIncrease in accounts receivable............................................ (60,000)Decrease in inventory........................................................... 51,000Decrease in accounts payable............................................... (77,000)

Cash paid for interest ($16,800 - $3,000).................................. (13,800) Cash paid for income tax ($98,000 - $14,000)........................... (84,000 ) Cash provided by operating ............................................................. $137,000

Investing activities:Long-term investments sold ($71,000 + $39,000)..................... 110,000Operational assets sold ($252,000 x 1/3 at loss of $12,000)...... 72,000Operational assets purchased (1)................................................ (278,000)

Cash used for investing activities..................................................... (96,000)

Financing activities:Issued bonds payable (2)............................................................ 35,000Common shares issued (3)......................................................... 165,000Paid dividend (4)........................................................................ (232,000 )

Cash used by financing activities..................................................... (32,000 ) Increase in cash................................................................................ 9,000Cash, beginning of the year.............................................................. 32,000Cash, end of the year........................................................................ $41,000

(1) $960,000 - $252,000 + $190,000 = $898,000 vs. $1,176,000(2) $180,000 - $65,000 + 190,000 = $305,000 vs $340,000(3) $250,000 + $65,000 = $315,000 vs. $480,000(4) $394,000 + $161,000 = $555,000 versus $323,000


Requirement 2CARAMONT LIMITED

Partial Statement of Cash Flowfor the year ended 31 December 20x9

Operating activities:Cash collected from customers ($1,467,000 - $60,000)............$1,407,000Cash paid to suppliers ($689,000 - $51,000 + $77,000)............ (715,000)Cash paid for expenses ($572,000 - $16,800 - $98,000)............ (457,200)

Cash paid for interest ($16,800 - $3,000).................................. (13,800) Cash paid for income tax ($98,000 - $14,000)........................... (84,000 ) Cash provided by operating ............................................................. $137,000


Assignment 5-23

Requirement 1LAURENT COMPANYStatement of Cash Flow

for the year ended 31 December 20x8

Operating activitiesNet earnings................................................................................ $156,000Plus (less) non-cash itemsDepreciation............................................................................... 12,000

168,000Plus (less) changes to working capital

Decrease in accounts receivable........................................... 3,000Increase in inventory............................................................ (15,000)Increase in accounts payable................................................ 18,000 $174,000

Financing activitiesIncrease in short-term bank loan................................................ 3,000Issued common shares for cash*................................................ 66,000Paid cash dividend ($24,000 + $156,000) vs $72,000............... (108,000) (39,000)

Investing activitiesSold long-term investment......................................................... 9,000Paid cash for capital assets......................................................... (27,000) ( 18,000)

Net change in cash............................................................................ 117,000Opening cash.................................................................................... ( 15,000)Closing cash..................................................................................... $102,000

* $24,000 non-cash issuance to retire long-term debt is not shown on the SCF. $150,000 + $24,000 = $174,000 vs. $240,000

Requirement 2LAURENT COMPANY

Partial Statement of Cash Flow for the year ended 31 December 20x8

OperationsCash collected from customers ($900,000 + $3,000)................ $903,000Cash paid to suppliers ($540,000 + $15,000 - $18,000)............ (537,000)Cash paid for other expenses...................................................... ( 192,000) $174,000


Assignment 5-24

Requirement 1

TODD CORPORATIONStatement of Cash Flow – Indirect Method


Operating ActivitiesNet earnings................................................................................ $138,000Adjustments for non-cash items:Depreciation............................................................................... 48,000Patent amortization..................................................................... 1,800

187,800Changes in current assets and current liabilities:

Accounts receivable increase............................................... (24,000)Inventory increase................................................................ (30,000)Accounts payable increase................................................... 60,000Accrued expenses increase................................................... 52,200 $246,000

Investing activitiesPurchase of long-term investment.............................................. (60,000)Purchase of short-term investment............................................. (18,000)Purchase of equipment ($360 - $48 = $312 versus $354).......... (42,000) (120,000)

Financing activitiesBonds retired.............................................................................. (120,000)Common shares issued............................................................... 57,000Dividends paid ($150 + $138 vs. $264)..................................... (24,000) (87,000 )

Net increase in cash.......................................................................... 39,000Cash balance, beginning of the year................................................. 90,000Cash balance, end of the year........................................................... $129,000

Requirement 2

Operating ActivitiesCash received from customers ($624,000 - $24,000)................ $600,000Cash paid for materials and services*........................................ (354,000 ) $246,000

* ($330,000 + $106,200) + $30,000 - $60,000 - $52,200 = $354,000


Optional Spreadsheet

Account Balance31 Dec. 20x3 Dr Cr

Balance31 Dec. 20x4

Cash 90,000 (n) 39,000 129,000Investment, short-term -- (k) 18,000 18,000Accounts receivable 102,000 (b) 24,000 126,000Inventory 60,000 (c) 30,000 90,000Investments, long-termProperty, plant, &

equipment (net)

--

360,000

(i) 60,000

(j) 42,000 48,000(e)

60,000

354,000Patent (net) 18,000 1,800(f) 16,200Other assets 42,000 42,000

Total assets 672,000 835,200

Accounts payable 72,000 60,000(d) 132,000Accrued expenses payable

-- 52,200(g) 52,200

Bonds payable 240,000 (h)120,000 120,000Common shares, no-par 210,000 57,000(m) 267,000Retained earnings 150,000 (l) 24,000 138,000(a) 264,000Total liabilities & owners' equity 672,000 835,200

Total changes 357,000 357,000Adjustments leading to SCF:Operating ActivitiesNet earnings (a) 138,000 24,000 (b)

(d) 60,000 30,000 (c)(e) 48,000(f) 1,800(g) 52,200 246,000

Investing ActivitiesPurchase long-term investment 60,000 (i)Purchase property, plant, & equipment 42,000 (j)Purchase short-term investment 18,000 (k) (120,000)

Financing ActivitiesBond retirement 120,000 (h)Dividend payments 24,000 (l)Issue common shares (m) 57,000 (87,000 )

Net cash increase 39,000 (n) 39,000 357,000 357,000


Assignment 5-25

SELLS COMPANYStatement of Cash Flow – Indirect Method


Operating Activities: Net earnings........................................................................ $61,000

Adjustments for non-cash items:Depreciation of equipment......................................... 45,000Amortization of intangible assets............................... 2,000Interest expense.......................................................... 3,000Income tax expense.................................................... 65,000 176,000

Changes in current assets and current liabilities:Accounts receivable decrease.................................... 3,000Other receivables decrease......................................... 1,000Inventory increase...................................................... (2,000)Accounts payable increase......................................... 10,000

Cash paid for interest ($3,000 - $2,000 + $1,000)......... (2,000) Cash paid for income tax ($65,000 + $20,000)............. (85,000 )

Net cash provided (used) by operating..................................... $101,000

Investing Activities:Sale of equipment............................................................... 20,000Purchase of equipment ($63,000 less $10,000 in shares)... (53,000 ) (33,000)

Financing Activities:Bond retired........................................................................ (32,000)Dividends paid ($6,000 + $61,000) vs. $47,000................. (20,000 ) (52,000 )

Net increase in cash................................................................. 16,000Cash balance, beginning of the year................................... 16,000Cash balance, end of the year............................................. $32,000


Optional Spreadsheet

Account Balances31 Dec. 20x4 Dr Cr

Balances31 Dec. 20x5

Cash 16,000 (o) 16,000 32,000Accounts receivable 50,000 3,000 (b) 47,000Other receivables 3,000 1,000 (h) 2,000Inventory 30,000 (d) 2,000 32,000Equipment 80,000 (c) 63,000 66,000 (m) 77,000Accumulated depreciation (6,000) (m) 46,000 45,000 (f) (5,000)Intangibles, net 55,000 2,000 (g) 53,000

Total assets 228,000 238,000Accounts payable 50,000 10,000 (e) 60,000Income taxes payable 70,000 (k) 20,000 50,000Interest payable 2,000 (j) 1,000 1,000Bonds payable 32,000 (n) 32,000 0Discount, bonds payable (2,000) 2,000 (i) 0Common shares, no-par 70,000 10,000 (c) 80,000Retained earnings 6,000 (l) 20,000 61,000 (a) 47,000Total 228,000 238,000

Total changes 200,000 200,000Operating Activities

Net earnings (a) 61,000 (b) 3,000 (h) 1,000

(e) 10,000 2,000 (d) (f) 45,000

(g) 2,000 (i) 2,000 1,000 (j) 20,000 (k) 101,000

Investing ActivitiesSale of equipment (m) 20,000Purchase of equipment 53,000 (c) (33,000)

Financing ActivitiesDividends paid 20,000 (l)Bond retirement 32,000 (n) (50,500) Net cash increase 16,000 (o) 16,000 144,000 144,000


Assignment 5-26

Requirement 1WTY PRODUCTS COMPANY

Cash Flow Statementfor the year ended 31 December 20x4

Operating activities:Earnings............................................................................................$ 369,600Adjustments for non-cash items:

Depreciation and amortization..................................................... 67,000Interest expense............................................................................ 34,600Income tax expense...................................................................... 312,800Loss on debt retirement................................................................ 12,000Gain on sale of equipment........................................................... (4,000 )


Accounts receivable increase....................................................... (70,000)Inventory decrease....................................................................... 60,800Accounts payable increase........................................................... 61,800Salaries and wages payable decrease........................................... (10,400)

Cash paid for interest....................................................................... (34,600) Cash paid for income tax ($312,800 +$14,400).............................. (327,200 ) Net cash flows from operations............................................................ $ 472,400

Investing activities:Sale of equipment (NBV $54,800 at a gain of $4,000)(1)........... 58,800Purchase of equipment ($2,233,000 - $76,000 = $2,157,000 versus $2,580,000).................................................... (423,000)


Financing activities:Long-term debt retired ($500,000 ; loss of $12,000)....................... (512,000)Long-term debt issued ($895,000 - $500,000) versus $980,000...... 585,000Common shares retired (380,000 +$57,000 +

$105,000 = $542,000 versus $383,000)................................. (159,000)Cash dividends paid ($68,700 reduction to RE - $57,000).............. (11,700 )

Net cash flows used for financing......................................................... (97,700 )

Net increase (decrease) in cash............................................................. 10,500Cash balance beginning of the year ..................................................... 6,000Cash balance end of the year................................................................ $16,500

(1) Net book value = cost of $76,000 (given); accumulated depreciation of $21,200 written off = $54,800. Accumulated depreciation: $1,378,000 + $64,000 ($67,000 - $3,000) = $1,442,000 versus closing balance of $1,420,800; $21,200 missing.


Requirement 2WTY PRODUCTS COMPANY

Cash Flow Statementfor the year ended 31 December 20x4

Operating activities:Cash received from customers ($2,600,000 – $70,000)...................$ 2,530,000Cash paid to suppliers and employees (1) ..................................... (1,695,800)(1)Cash paid for income tax.................................................................. (327,200 )

Net cash flows from operations........................................................... $ 507,000

Investing activities:Sale of equipment (NBV $54,800 at a gain of $4,000)(1)........... 58,800Purchase of equipment ($2,233,000 - $76,000 = $2,157,000 versus $2,580,000..................................................... (423,000)


Financing activities:Interest paid.................................................................................. (34,600)Long-term debt retired ($500,000 ; loss of $12,000)................... (512,000)Long-term debt issued ($895,000 - $500,000) versus $980,000. 585,000Common shares retired (380,000 +$57,000 + $105,000 = $542,000 versus $383,000)................................. (159,000)Cash dividends paid ($68,700 reduction to RE - $57,000).......... (11,700 )

Net cash flows used for financing......................................................... (132,300 )

Net increase (decrease) in cash............................................................. 10,500Cash balance beginning of the year ..................................................... 6,000Cash balance end of the year................................................................ $16,500

(1)Cash expenses: ($1,875,000 – depreciation $67,000)................($1,808,000) Changes in net working capital:Inventory decrease....................................................................... 60,800Accounts payable increase........................................................... 61,800Salaries and wages payable decrease........................................... (10,400 ) ($1,695,800 )


Assignment 5-27

Buffalo Inc.Statement of Cash Flow


Cash for operating activities: Net earnings (loss)................................................................... (71,000)

Plus/minus:Gain on sale of land............................................................ (22,000)Loss on sale of machine...................................................... 27,000Interest expense................................................................... 115,000Income tax recovery............................................................ (54,000)Depreciation ($110,000 + $75,000).................................... 185,000

180,000 Changes in working capital

Receivables......................................................................... (40,000)Inventory............................................................................. (99,000)Current liabilities................................................................ (75,000)

Cash paid for interest............................................................. (115,000) Cash received for income tax................................................. 54,000

Cash for operating activities.............................................. (95,000)

Cash from financing:Issued preferred shares, for cash......................................... 205,000Dividends—preferred......................................................... (50,000)Dividends—common (plug) ($311-$71-$50-$148)............ (42,000)Purchase of common shares................................................ (55,000 ) Cash from financing............................................................ 58,000

Cash from investing:Sale of marketable securities.............................................. 40,000Sale of building................................................................... 60,000Sale of machine (Given; book value of $67 and cost of $135) 40,000Sale of land ($80 + $22)..................................................... 102,000Purchase of machine ($875 + $120 - $135) versus $1,080. (220,000)

Cash from investing................................................... 22,000Decrease in cash.................................................................. (15,000)Opening balance.................................................................. 20,000Closing balance................................................................... 5,000


Assignment 5-28SUPREME COMPANYStatement of Cash Flow


Cash from customers ($399,100 + $7,500)................................ $406,600Cash paid for materials and labour (1)....................................... (310,800)Cash paid for interest ($4,400 - $1,200).................................... (3,200)Cash paid for income tax ($24,600 - $4,400)............................. (20,200)Cash interest received................................................................. 900

Cash generated from operations........................................... $73,300Investing activities:

Sold long-term investment......................................................... 40,000Purchased land............................................................................ (28,400)


Dividends paid ($28,000 + $18,400 versus $16,400)................ (30,000)Bonds payable retired................................................................. (50,000)

Cash used for financing........................................................ (80,000)Net increase in cash during the year................................................. 4,900Cash balance, beginning of the year................................................. 40,000Cash balance, end of the year........................................................... $44,900

(1) $224,400 + $80,000 + $44,000 - $38,400 + $300 + $500



BOOLE, INCStatement of Cash Flow


Operating activitiesNet earnings.......................................................................... $790,000Plus (less): non-cash charges

Depreciation................................................................... 250,000aGain on sale of investment............................................. ( 35,000)

1,005,000 Changes in working capital:

Inventory increase.......................................................... (80,000)Accounts payable and accrued liabilities decrease........ ( 5,000) $920,000

Investing activitiesSale of building.................................................................... 350,000Purchase of plant assets........................................................ (1,190,000)bSale of long-term investments.............................................. 135,000 (705,000)

Financing activitiesDividends paid...................................................................... (340,000)cIssuance of common shares.................................................. 220,000 (120,000 )

Net increase in cash and cash equivalents.................................. $95,000d

Computations:a Depreciation expense = $250,000 because accumulated depreciation did not change

during the year and the building disposal caused accumulated depreciation to decrease $250,000.

b Plant asset increase = $700,000 = plant asset purchases in 20x5 + $110,000 acquisition through debt - $600,000 cost of building soldPlant asset purchases in 20x5 = $1,190,000

c Retained earnings increase = $290,000 = $790,000 earnings - Dividends declaredDividends declared = $500,000Dividends payable increase = $160,000Dividends paid = $340,000 ($500,000 - $160,000)

d Change in cash ................................................................... $120,000 drChange in short-term investments...................................... 300,000 drChange in bank overdraft.................................................... (325,000 ) cr $95,000 dr


Assignment 5-30

Requirement 1

Generally accepted accounting principles (GAAP) represent the body of accounting practices that has been built up over a long period of time through use. GAAP include established standards, IFRS for public companies and either IFRS or ASPE for private companies. GAAP are designed to be appropriate for general purpose financial statements and external users.

Requirement 2

Financial statements have the common objective of communicating information useful to users in making resource allocation decisions and to assist in evaluation of manangement. In more specific, or situational, circumstances, common objectives of financial statements include,

a. Assessing and predicting cash flows.b. Income tax minimization.c. Contract compliance.d. Performance evaluation.

Management may be motivated to report high or low income, smooth income, or provide minimum compliance.

Requirement 3

1. Store supplies expense ($12,400-$5,600).............. 6,800Store supplies.................................................. 6,800

2. Depreciation expense ($198,000-$10,000)/8........ 23,500Accumulated depreciation.............................. 23,500

3. Prepaid property taxes ($3,200 x 9/12)................. 2,400Property tax expense...................................... 2,400

4. Interest expense ($232,000 x .12 x 2/12).............. 4,640Interest payable.............................................. 4,640

5. Interest receivable ($120,000 x .10 x 7/12)......... 7,000Interest revenue............................................. 7,000

6. Bad debt expense ($76,000-$3,000).................... 73,000Allowance for doubtful accounts.................. 73,000


7. Unearned revenue 32,000 x ¼....................... 8,000Revenue.................................................. 8,000

8. Accounts receivable (accrued)...................... 10,000Revenue................................................. 10,000

Requirement 4

a. The time-period assumption requires that changes in a business’ financial position be reported over a series of time periods shorter than its life span. This meets users’ needs for information. Accruals and deferrals are necessary to properly reflect financial position. AJEs 3,4,5,7, and 8 in requirement 3 are accruals or deferrals.

b. The continuity assumption, or going concern assumption, is that the entity will stay in business long enough to complete operations, contracts, etc. AJE #2 is the best example from requirement 3, since it assumes that the business will be around long enough to recoup capital assets over their useful lives. Entries #3 and #7 are also examples.

c. The accrual concept involves recognizing the effects of transactions when they occur, prior to their (cash) realization. AJE’s #4, #5 and #8 are accruals.

d. The revenue recognition convention requires that revenues are recognized only when they meet the definition of revenue, and are measurable and probable. Typically, this means that the seller has performed all significant acts. Revenue is recognized in AJE #5 (as time passes) in #7 (as work is done) and in #8 (as goods are delivered).


Requirement 5Argot Flooring Ltd.

Statement of Comprehensive Incomefor the year ended31 December 20x5

Revenue ($2,632,000 + $10,000 + $8,000) $2,650,000Cost of goods sold 1,042,000Gross profit 1,608,000Operating expenses:

General operating expenses $ 338,000Salaries expense 232,000Store supplies expense 6,800Depreciation expense 23,500Property tax expense 800Bad debts expense 73,000 674,100

Other income and expenseInterest revenue 12,000Interest expense 4,640 7,360

Income before tax 941,260Income tax expense 334,600Net earnings and comprehensive income $606,660

Argot Flooring Ltd.Statement of Changes in EquityYear ended 31 December 20x5

Common shares

Retained earnings

Opening balance, 1 January $204,100 $806,400Plus: Net earnings and comprehensive income 606,660Less: dividends declared ______ (80,000)Closing balance, 31 December $204,100 $1,333,060


Argot Flooring Ltd.Statement of Financial Position

31 December 20x5

AssetsCurrent Assets

Cash (plug) $483,000Accounts receivable (net) ($632,000 + $10,000 - $76,000) 566,000Interest receivable 7,000Inventory 480,000Store supplies inventory 5,600Prepaid property tax 2,400

1,544,000Investments

Notes Receivable 120,000Capital Assets

Buildings and equipment 198,000Less: accumulated depreciation ($42,000 + $23,500) 65,500 132,500Land 398,000

530,500Total Assets $2,194,500

LiabilitiesCurrent

Accounts payable $280,000Interest payable 4,640Current portion of long-term debt 30,000Unearned revenue 24,000

$338,640Non-current

Notes payable 232,000Less: current portion (30,000) 202,000Deferred income tax 116,700

Total liabilities $657,340

Shareholders’ EquityCommon shares 204,100Retained earnings 1,333,060

Total shareholders’ equity 1,537,160Total liabilities and shareholders’ equity $2,194,500


Requirement 6

Operating activitiesNet earnings ......................................................................... $606,660Plus (less):

Depreciation expense..................................................... 23,500Interest expense.............................................................. 4,640Interest revenue.............................................................. (12,000)Income tax expense........................................................ 334,600

. 957,400Changes in working capital:

Decrease in accounts receivable..................................... 41,900Increase in inventory...................................................... (136,000)Decrease in store supplies inventory.............................. 8,000Increase in accounts payable.......................................... 75,000Increase in unearned revenue......................................... 24,000

Cash paid for interest ($4,640 -$4,640)................................. 0 Cash paid for income tax ($334,600 expense – $26,400 increase in deferred tax).............................. (308,200) Cash received for interest...................................................... 12,000Cash from operations................................................................. $674,100


Documents

Chapter 5 · Web viewThe statement of cash flow reports cash flows for operating, investing, and financing activities. The SCF’s primary function is to disclose historical cash