Financial Accounting for Undergraduates
Financial Accounting for Undergraduates
2nd Edition
ISBN: 9781618530400
Author: FERRIS
Publisher: Cambridge
Question
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Chapter 12, Problem 1AP

a.

To determine

Calculate the change in cash that occurred during 2013.

a.

Expert Solution
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Explanation of Solution

Calculate the change in cash during 2013.

Cash balance as of 31st December 2012 is $5,000

Cash balance as of 31st December 2013 is $11,000

Change in cash =Cash balance in 2013Cash balance in 2012=$11,000$5,000=$6,000

Hence, the change in cash during 2013 is $6,000.

b.

To determine

Prepare a statement of cash flows using indirect method for Company W.

b.

Expert Solution
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Explanation of Solution

Statement of cash flows: Statement of cash flows reports all the cash transactions which are responsible for inflow and outflow of cash and result of these transactions is reported as ending balance of cash at the end of reported period. Statement of cash flows includes the changes in cash balance due to operating, investing, and financing activities.

Indirect method: Under this method, the following amounts are to be adjusted from the Net Income to calculate the net cash provided from operating activities.

Prepare a statement of cash flows using indirect method for Company W.

Company W
Statement of Cash Flows – Indirect Method
For the year ended December 31, 2013
DetailsAmount ($)Amount ($)
Cash flows from operating activities:  
Net income 56,000
Adjustments to reconcile net income to net cash provided by operating activities:  
Depreciation expense17,000 
Increase in accounts receivable(9,000) 
Increase in merchandise inventory(30,000) 
Decrease in prepaid insurance2,000 
Decrease in accounts payable(3,000) 
Increase in wages payable3,000 
Decrease in income tax payable(1,000)(21,000)
Net cash provided by operating activities 35,000
Cash flows from investing activities:  
Acquisition of plant asset (1)(55,000) 
Net cash used for investing activities (55,000)
Cash flows from financing activities:  
Issuance of bonds payable (2)55,000 
Cash payment of dividends(29,000) 
Net cash provided by financing activities 26,000
Net increase (decrease) in Cash 6,000
Cash balance, December 31, 2012 5,000
Cash balance, December 31, 2013 11,000

Table (1)

Working note:

Prepare the schedule in the change of current assets and liabilities.

Schedule in the Change of Current Assets and Liabilities
DetailsAmount ($)Effect on Operating Activities

2013

($)

2012

($)

Increase/

(Decrease)

($)

Accounts receivable41,00032,0009,000Less
Inventory90,00060,00030,000Less
Prepaid insurance5,0007,000(2,000)Add
Accounts payable7,00010,000(3,000)Less
Wages payable9,0006,0003,000Add
Income tax payable7,0008,000(1,000)Less

Table (2)

Calculate the acquisition of plant:

Plant account
Beginning balance$195,000  
Acquisition$55,000  
Ending balance$250,000  

(1)

Calculate the issue of bonds payable for cash:

Bonds payable in 2013 = $130,000

Bonds payable in 2012 = $75,000

Issunace of bonds payable for cash =$130,000$75,000=$55,000 (2)

Thus, the cash balance of Company S is $11,000.

c.

To determine

Compute the free cash flow for Company W.

c.

Expert Solution
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Explanation of Solution

Free cash flow:

Free cash flow signifies cash that is provided by the operations of the Company after making capital expenditures for acquiring or expanding its assets.

Formula to calculate free cash flow:

Free cash flow= (Net cash flows from operating activities Dividends  Net capital expenditures)

Compute free cash flow:

Amount of net cash flow from operating activities is $35,000

Amount of Net capital expenditure is $55,000

Amount of dividend is $29,000

Free cash flow= (Net cash flows from operating activities Dividends  Net capital expenditures)=$35,000$29,000$55,000=($49,000)

Thus, the free cash flow of Company S is (49,000).

d.

To determine

Compute the operating cash flow to current liabilities ratio for Company W.

d.

Expert Solution
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Explanation of Solution

Operating cash flow to current liabilities ratio measures the capability of the company to pay it current liabilities. In this, higher the ratio shows that the company has sufficient cash flow to pay its debts.

Formula to calculate the operating cash flow to current liabilities ratio is:

Operating cash flows to current liabilities ratio)=Cash flows from operating activitiesAverage current liabilities

Compute the Operating cash flow to current liabilities ratio.

Amount of cash flow from operating activities is $60,000

Amount of average current liabilities is $23,500 (3)

Operating cash flows to current liabilities ratio)=Cash flows from operating activitiesAverage current liabilities=$35,000$23,500=1.49

Working note:

Calculate the average current liabilities:

Average current liabilities = (Current liabilities, 2012  + Current liabilities, 2013)2=($10,000+$6,000+$8,000)+($7,000+$9,000+$7,000)2=$23,500 (3)

Thus, the operating cash flow to current liabilities ratio of Company W is 1.49.

e.

To determine

Compute the operating cash flow to capital expenditure ratio for Company W.

e.

Expert Solution
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Explanation of Solution

Operating cash flow to capital expenditure ratio measures the capability of the company to finance its capital investments from the operating cash flow.

Formula to calculate cash flow to capital expenditure ratio is:

Operating cash flows to capital expenditure ratio)=Cash flows from operating activitiesAnnual net capital expenditure

Compute the operating cash flow to capital expenditure ratio.

Cash flow from operating activities is $35,000

Amount of capital expenditure is $55,000

Operating cash flows to capital expenditure ratio)=Cash flows from operating activitiesAnnual net capital expenditure=$35,000$55,000=0.64

Thus, the operating cash flow to expenditure ratio of Company W is 0.64.

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Chapter 12 Solutions

Financial Accounting for Undergraduates

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