Beruflich Dokumente
Kultur Dokumente
Average current
liabilities
$129,000
[Per Part (a)]
$47,000+$39,000
2
=3.0 times
2. Cash debt coverage ratio:
Net cash provided
by operating activities
Average total
liabilities
$129,000
$247,000*+$189,000**
2
= .59 times
*$47,000 + $200,000 **$39,000 + $150,000
EXERCISE 12-9
PepsiCo Coca-Cola
(a)Liquidity
Current cash debt
coverage ratio
$6,084
$8,133
= .75 times
$5,957
$9,363
= .64 times
(b)Solvency
Cash debt coverage ratio
$6,084
$16,019
= .38 times
$5,957
$13,058
= .46 times
Free cash fow
$6,084 $2,068 $1,854
= $2,162
$5,957 $1,407 $2,911
= $1,639
PepsiCos liquidity is higher (better) than Coca-Colas. PepsiCos current cash
debt coverage ratio is 17% higher than Coca-Colas. Coca-Colas solvency is
slightly higher than PepsiCos since its cash debt coverage ratio is higher but
its free cash fow smaller.
12-18 Copyright 2009 John Wiley & Sons, Inc. Kimmel, Financial Accounting, 5/e, Solutions Manual ( For Instructor Use Only)
EXERCISE 12-10
Hoyt
Corporation
Rex
Corporation
(a) Liquidity
Current cash debt
coverage ratio
$100,000
$50,000
= 2.0 times
$100,000
$100,000
= 1.0 times
(b) Solvency
Cash debt
coverage ratio
$100,000
$200,000
= .50 times
$100,000
$250,000
= 0.40 times
Free cash fow
$100,000 $40,000 $5,000
= $55,000
$100,000 $70,000 $10,000
= $20,000
Hoyts liquidity and solvency ratios are higher (better) than Rexs comparable
ratios. In particular, Hoyts current cash debt coverage ratio is twice as high as
Rexs. This ratio indicates that Hoyt is substantially more liquid than Rex. Hoyts
solvency, as measured by the cash debt coverage ratio and free cash fow, is
also better than Rexs.
*EXERCISE 12-11
Revenues.................................................................. $192,000)
Deduct: Increase in accounts receivable............. (70,000)
Cash receipts from customers*...................... $122,000
Operating expenses................................................ 83,000 )
Deduct: Increase in accounts payable.................. (23,000)
Cash payments for operating expenses**..... 60,000
Net cash provided by operating activities............. $62,000
** Accounts Receivable
Balance, Beginning of year 0
Revenues for the year 192,000 Cash receipts for year 122,000
Balance, End of year 70,000
** Accounts Payable
Payments for the year 60,000
Balance, Beginning of year 0
Operating expenses for year 83,000
Balance, End of year 23,000
Copyright 2009 John Wiley & Sons, Inc. Kimmel, Financial Accounting, 5/e, Solutions Manual ( For Instructor Use Only) 12-19
*EXERCISE 12-12
(a)Cash payments to suppliers
Cost of goods sold......................... $5,349.7million
Add: Increase in inventory........... 4.7
Cost of purchases.......................... $5,354.4million
Deduct: Increase in accounts
payable............................ (156.1 )
Cash payments to suppliers......... $5,198.3million
(b)Cash payments for operating expenses
Operating expenses exclusive
of depreciation
($11,791.6 $1,249.9) ................. $10,541.7million
Deduct: Decrease in prepaid
expenses......................... $(204.5)
Increase in accrued
expenses payable ....................... (37.0) (241.5)
Cash payments for operating
expenses ..................................... $10,300.2million
*EXERCISE 12-13
Cash fows from operating activities
Cash receipts from
Customers.................................................. $240,000*
Dividend revenue....................................... 18,000 *
258,000*
Less cash payments:
To suppliers for merchandise................... $105,000
For salaries and wages............................. 53,000
For operating expenses............................ 28,000
For income taxes....................................... 12,000
For interest................................................. 10,000 208,000*
Net cash provided by operating
activities .................................................. $50,000*
*$48,000 + $192,000
12-20 Copyright 2009 John Wiley & Sons, Inc. Kimmel, Financial Accounting, 5/e, Solutions Manual ( For Instructor Use Only)
*EXERCISE 12-14
MOSQUITO HOLLOW CORP.
Statement of Cash FlowsDirect Method
For the Year Ended December 31, 2010
Cash fows form operating activities
Cash receipts from customers............................ $566,100
Less: Cash payments:
For goods and services................................. $279,100
For income taxes............................................ 93,000
For operating expenses................................. 77,000
For interest..................................................... 22,400 471,500
Net cash provided by operating
activities................................................ 94,600
Cash fows form investing activities
Sale of building.............................................. 202,400
Purchase of equipment................................. (113,200)
Net cash provided by investing
activities................................................ 89,200
Cash fows from fnancing activities
Issuance of common stock........................... 355,000
Payment of cash dividend............................. (21,800)
Purchase treasury stock............................... (57,300)
Cash paid to redeem bonds at maturity....... (200,000)
Net cash provided by fnancing
activities................................................ 75,900
Net increase in cash................................................... 259,700
Cash at beginning of period...................................... 11,000
Cash at end of period................................................. $270,700
Copyright 2009 John Wiley & Sons, Inc. Kimmel, Financial Accounting, 5/e, Solutions Manual ( For Instructor Use Only) 12-21
*EXERCISE 12-15
Cash payments for rentals
Rent expense................................................................ $ 30,000*
Add: Increase in prepaid rent.................................... 3,100 *
Cash payments for rent............................................... $ 33,100*
Cash payments for salaries
Salaries expense.......................................................... $ 54,000*
Add: Decrease in salaries payable............................ 2,000 *
Cash payments for salaries........................................ $ 56,000*
Cash receipts from customers
Revenue from sales..................................................... $160,000*
Add: Decrease in accounts receivable..................... 9,000 *
Cash receipts from customers................................... $169,000*
12-22 Copyright 2009 John Wiley & Sons, Inc. Kimmel, Financial Accounting, 5/e, Solutions Manual ( For Instructor Use Only)
SOLUTIONS TO PROBLEMS
PROBLEM 12-1A
Transaction Where Reported
Cash Infow,
Outfow, or No
Efect?
(a)Recorded depreciation
expense on the plant assets.
O No cash fow efect
(b)Recorded and paid interest
expense.
O Cash outfow
(c)Recorded cash proceeds from
a sale of plant assets.
I Cash infow
(d)Acquired land by issuing
common stock.
NC No cash fow efect
(e)Paid a cash dividend
to preferred stockholders.
F Cash outfow
(f) Distributed a stock dividend
to common stockholders.
NC No cash fow efect
(g)Recorded cash sales. O Cash infow
(h)Recorded sales on account. O No cash fow efect
(i) Purchased inventory for cash. O Cash outfow
(j) Purchased inventory on
account.
O No cash fow efect
Copyright 2009 John Wiley & Sons, Inc. Kimmel, Financial Accounting, 5/e, Solutions Manual ( For Instructor Use Only) 12-23
PROBLEM 12-2A
(a)Net income can be determined by analyzing the retained earnings
account.
Retained earnings beginning of year...........................$270,000
Add: Net income (plug)................................................. 60,500*
330,500
Less: Cash dividends................................................... 20,000
Stock dividends.................................................. 10,500
Retained earnings, end of year....................................$300,000
*($300,000 + $10,500 + $20,000 $270,000)
(b)Cash infow from the issue of stock was $14,500 ($165,000 $140,000
$10,500).
Common Stock
140,000
10,500 Stock Dividend
14,500 Shares Issued for Cash
165,000
Cash outfow for dividends was $20,000. The stock dividend does not
use cash.
(c)Both of the above activities (issue of common stock and payment of
dividends) would be classifed as fnancing activities on the statement of
cash fows.
12-24 Copyright 2009 John Wiley & Sons, Inc. Kimmel, Financial Accounting, 5/e, Solutions Manual ( For Instructor Use Only)
PROBLEM 12-3A
GRIDER COMPANY
Partial Statement of Cash Flows
For the Year Ended November 30, 2010
Cash fows from operating activities
Net income............................................................. $1,650,000
Adjustments to reconcile net income
to net cash provided by operating
activities
Depreciation expense..............................$ 80,000
Decrease in inventory.............................. 500,000
Decrease in accrued expenses payable.... (100,000)
Increase in prepaid expenses.................(150,000)
Increase in accounts receivable.............(300,000)
Decrease in accounts payable................ (350,000) (320,000)
Net cash provided by operating
activities............................................ $1,330,000
Copyright 2009 John Wiley & Sons, Inc. Kimmel, Financial Accounting, 5/e, Solutions Manual ( For Instructor Use Only) 12-25
*PROBLEM 12-4A
GRIDER COMPANY
Partial Statement of Cash Flows
For the Year Ended November 30, 2010
Cash fows from operating activities
Cash receipts from customers......... $7,400,000(1)
Less cash payments:
To suppliers................................ $4,750,000(2)
For operating expenses............. 1,320,000(3) 6,070,000
Net cash provided by operating
activities .......................................... $1,330,000
Computations:
(1)Cash receipts from customers
Sales................................................................... $7,700,000
Deduct: Increase in accounts receivable....... (300,000 )
Cash receipts from customers......................... $7,400,000
(2)Cash payments to suppliers
Cost of goods sold............................................ $4,900,000
Deduct: Decrease in inventories..................... (500,000 )
Cost of purchases............................................. 4,400,000
Add: Decrease in accounts payable............... 350,000
Cash payments to suppliers............................. $4,750,000
(3)Cash payments for operating expenses
Operating expenses, exclusive
of depreciation ................................ $1,070,000*
Add: Increase in prepaid
expenses................................... $150,000
Decrease in accrued
expenses payable .................... 100,000 250,000
Cash payments for operating
expenses ......................................... $1,320,000
12-26 Copyright 2009 John Wiley & Sons, Inc. Kimmel, Financial Accounting, 5/e, Solutions Manual ( For Instructor Use Only)
*$450,000 + ($700,000 $80,000)
Copyright 2009 John Wiley & Sons, Inc. Kimmel, Financial Accounting, 5/e, Solutions Manual ( For Instructor Use Only) 12-27
PROBLEM 12-5A
JANTZEN COMPANY
Partial Statement of Cash Flows
For the Year Ended December 31, 2010
Cash fows from operating activities
Net income......................................................... $230,000
Adjustments to reconcile net income
to net cash provided by operating
activities
Depreciation expense................................ $70,000
Loss on sale of equipment....................... 16,000
Increase in accounts payable................... 13,000
Increase in income taxes payable............ 6,000
Increase in accounts receivable............... (10,000) 95,000
Net cash provided by operating
activities .................................................. $325,000
12-28 Copyright 2009 John Wiley & Sons, Inc. Kimmel, Financial Accounting, 5/e, Solutions Manual ( For Instructor Use Only)
*PROBLEM 12-6A
JANTZEN COMPANY
Partial Statement of Cash Flows
For the Year Ended December 31, 2010
Cash fows from operating activities
Cash receipts from customers......... $960,000(1)
Less cash payments:
For operating expenses............. $601,000(2)
For income taxes........................ 34,000 (3) 635,000
Net cash provided by operating
activities .......................................... $325,000
(1)Computation of cash receipts from customers
Revenues.......................................................................... $970,000
Deduct: Increase in accounts receivable
($70,000 $60,000)........................................... (10,000)
Cash receipts from customers....................................... $960,000
(2)Computation of cash payments for operating expenses
Operating expenses per income statement.................. $614,000
Deduct: Increase in accounts payable
($41,000 $28,000)........................................... (13,000)
Cash payments for operating expenses........................ $601,000
(3)Computation of cash payments for income taxes
Income tax expense per income statement.................. $ 40,000
Deduct: Increase in income taxes payable
($13,000 $7,000)............................................. (6,000)
Cash payments for income taxes.................................. $ 34,000
Copyright 2009 John Wiley & Sons, Inc. Kimmel, Financial Accounting, 5/e, Solutions Manual ( For Instructor Use Only) 12-29
PROBLEM 12-7A
(a) TRAHAN COMPANY
Statement of Cash Flows
For the Year Ended December 31, 2010
Cash fows from operating activities
Net income................................................... $32,000
Adjustments to reconcile net income
to net cash provided by operating
activities
Depreciation expense........................... $17,500*
Increase in accounts payable............... 9,000
Decrease in income taxes payable...... (1,000)
Increase in merchandise inventory...... (7,000)
Increase in accounts receivable.......... (19,000) (500)
Net cash provided by operating
activities .............................................. 31,500
Cash fows from investing activities
Sale of equipment....................................... 8,500
Cash fows from fnancing activities
Issuance of common stock........................ 4,000
Redemption of bonds.................................. (6,000)
Payment of dividends................................. (20,000)
Net cash used by fnancing
activities.............................................. (22,000)
Net increase in cash........................................... 18,000
Cash at beginning of period.............................. 20,000
Cash at end of period......................................... $38,000
*$32,000 ($24,000 $9,500
(A)
) = $17,500
(A)
$18,000 (cost of equipment) $8,500 (book value) = $9,500 (accumulated
depreciation for equipment sold)
12-30 Copyright 2009 John Wiley & Sons, Inc. Kimmel, Financial Accounting, 5/e, Solutions Manual ( For Instructor Use Only)
PROBLEM 12-7A (Continued)
(b)1.
$31,500
[Per Part (a)]
$23,000*+$31,000**
2
= 1.17 times
*$15,000 + $8,000 **$24,000 + $7,000
2. $31,500
$56,000*+$58,000**
2
= .55 times
*$15,000 + $8,000 + $33,000 **$24,000 + $7,000 + $27,000
3. $31,500 $0 $20,000 = $11,500
Copyright 2009 John Wiley & Sons, Inc. Kimmel, Financial Accounting, 5/e, Solutions Manual ( For Instructor Use Only) 12-31
*PROBLEM 12-8A
(a) TRAHAN COMPANY
Statement of Cash Flows
For the Year Ended December 31, 2010
Cash fows from operating activities
Cash receipts from customers...... $223,000(1)
Less cash payments:
To suppliers............................. $173,000(2)
For operating expenses.......... 6,500 (3)
For interest............................... 3,000
For income taxes..................... 9,000 (4) 191,500
Net cash provided by
operating activities .............. 31,500
Cash fows from investing activities
Sale of equipment........................... 8,500
Cash fows from fnancing activities
Issuance of common stock............ 4,000
Redemption of bonds..................... (6,000)
Payment of dividends..................... (20,000)
Net cash used by fnancing
activities ............................... (22,000)
Net decrease in cash.............................. 18,000
Cash at beginning of period.................. 20,000
Cash at end of period............................. $38,000
Computations:
(1)Cash receipts from customers
Sales......................................................................... $242,000
Deduct: Increase in accounts receivable............. (19,000)
Cash receipts from customers....................................... $223,000
12-32 Copyright 2009 John Wiley & Sons, Inc. Kimmel, Financial Accounting, 5/e, Solutions Manual ( For Instructor Use Only)
*PROBLEM 12-8A (Continued)
(2)Cash payments to suppliers
Cost of goods sold........................................................ $175,000
Add: Increase in inventory........................................... 7,000
Cost of purchases......................................................... 182,000
Deduct: Increase in accounts payable........................ 9,000
Cash payments to suppliers......................................... $173,000
(3)Cash payments for operating expenses
Operating expenses...................................................... $24,000
Deduct: Depreciation
$32,000 ($24,000 $9,500*)......................... 17,500
Cash payments for operating expenses...................... $ 6,500
*$18,000 $8,500 = $9,500
(4)Cash payments for income taxes
Income tax expense....................................................... $8,000
Add: Decrease in income taxes payable..................... 1,000
Cash payments for income taxes................................. $9,000
(b)1.
$31,500
[Per Part (a)]
$23,000**+$31,000***
2
= 1.17 times
**$15,000 + $8,000 ***$24,000 + $7,000
2. $31,500
$56,000*+$58,000**
2
= .55 times
*$15,000 + $8,000 + $33,000 **$24,000 + $7,000 + $27,000
3. $31,500 $0 $20,000 = $11,500
Copyright 2009 John Wiley & Sons, Inc. Kimmel, Financial Accounting, 5/e, Solutions Manual ( For Instructor Use Only) 12-33
PROBLEM 12-9A
CIPRA INC.
Statement of Cash Flows
For the Year Ended December 31, 2010
Cash fows from operating activities
Net income......................................................... $158,900
Adjustments to reconcile net income
to net cash provided by operating
activities
Depreciation expense................................ $46,500
Increase in accounts payable................... 34,700
Loss on sale of plant assets..................... 7,500
Decrease in accrued expenses payable.... (500 )
Increase in prepaid expenses................... (2,400)
Increase in inventory................................. (9,650)
Increase in accounts receivable............... (54,800) 21,350
Net cash provided by operating
activities .................................................. 180,250
Cash fows from investing activities
Sale of plant assets........................................... 1,500
Purchase of investments.................................. (24,000)
Purchase of plant assets.................................. (100,000)
Net cash used by investing
activities .................................................. (122,500)
Cash fows from fnancing activities
Sale of common stock...................................... 45,000
Payment of cash dividends.............................. (30,350)
Redemption of bonds........................................ (40,000 )
Net cash used by fnancing
activities .................................................. (25,350)
Net increase in cash................................................. 32,400
Cash at beginning of period..................................... 48,400
Cash at end of period............................................... $80,800
12-34 Copyright 2009 John Wiley & Sons, Inc. Kimmel, Financial Accounting, 5/e, Solutions Manual ( For Instructor Use Only)
*PROBLEM 12-10A
CIPRA INC.
Statement of Cash Flows
For the Year Ended December 31, 2010
Cash fows from operating activities
Cash receipts from customers.............. $337,980(1)
Less cash payments:
To suppliers..................................... $110,410(2)
For income taxes............................. 27,280
For operating expenses.................. 15,310 (3)
For interest...................................... 4,730 157,730
Net cash provided by operating
activities ....................................... 180,250
Cash fows from investing activities
Sale of plant assets................................ 1,500
Purchase of investments....................... (24,000)
Purchase of plant assets....................... (100,000)
Net cash used by investing
activities ....................................... (122,500)
Cash fows from fnancing activities
Sale of common stock............................ 45,000
Payment of cash dividends................... (30,350)
Redemption of bonds............................. (40,000 )
Net cash used by fnancing
activities ....................................... (25,350)
Net increase in cash....................................... 32,400
Cash at beginning of period.......................... 48,400
Cash at end of period..................................... $80,800
Computations:
(1)Cash receipts from customers
Sales.................................................................. $392,780
Copyright 2009 John Wiley & Sons, Inc. Kimmel, Financial Accounting, 5/e, Solutions Manual ( For Instructor Use Only) 12-35
Deduct: Increase in accounts receivable...... (54,800)
Cash receipts from customers....................... $337,980
12-36 Copyright 2009 John Wiley & Sons, Inc. Kimmel, Financial Accounting, 5/e, Solutions Manual ( For Instructor Use Only)
*PROBLEM 12-10A (Continued)
(2)Cash payments to suppliers
Cost of goods sold.......................................................... $135,460
Add: Increase in inventory............................................ 9,650
Cost of purchases........................................................... 145,110
Deduct: Increase in accounts payable......................... (34,700)
Cash payments to suppliers.......................................... $110,410
(3)Cash payments for operating expenses
Operating expenses exclusive of
depreciation............................................... $12,410
Add: Increase in prepaid expenses................$2,400
Decrease in accrued expenses
payable.................................................. 500 2,900
Cash payment for operating
expenses.................................................... $15,310
Copyright 2009 John Wiley & Sons, Inc. Kimmel, Financial Accounting, 5/e, Solutions Manual ( For Instructor Use Only) 12-37
PROBLEM 12-11A
MERCADO COMPANY
Statement of Cash Flows
For the Year Ended December 31, 2010
Cash fows from operating activities
Net income............................................................. $ 37,000
Adjustments to reconcile net income
to net cash provided by operating
activities
Depreciation expense.................................... $42,000
Decrease in accounts receivable................. 12,000
Decrease in prepaid expenses..................... 5,720
Increase in accounts payable....................... 4,730
Loss on sale of equipment........................... 2,000
Increase in inventory..................................... (9,450) 57,000
Net cash provided by operating
activities ...................................................... 94,000
Cash fows from investing activities
Sale of land............................................................ 25,000
Sale of equipment................................................. 8,000
Purchase of equipment......................................... (95,000)
Net cash used by investing activities.......... (62,000)
Cash fows from fnancing activities
Payment of cash dividends.................................. (12,000)
Net cash used by fnancing activities.......... (12,000)
Net increase in cash..................................................... 20,000
Cash at beginning of period......................................... 45,000
Cash at end of period................................................... $65,000
Noncash investing and fnancing activities
Conversion of bonds by issuance
of common stock........................................... $40,000
12-38 Copyright 2009 John Wiley & Sons, Inc. Kimmel, Financial Accounting, 5/e, Solutions Manual ( For Instructor Use Only)
PROBLEM 12-12A
Transaction
Free Cash
Flow
($125,000)
Current
Cash Debt
Coverage
Ratio
(0.5 times)
Cash Debt
Coverage
Ratio
(0.3 times)
(a) Recorded credit sales
$2,500.
NE NE NE
(b) Collected $1,500 owing
from customers.
I I I
(c) Paid amount owing
to suppliers, $2,750.
D D D
(d) Recorded sales returns
of $500 and credited the
customers account.
NE NE NE
(e) Purchased new
equipment $5,000;
signed a long-term note
payable for the cost of
the equipment.
D* NE D
(f) Purchased a patent and
paid $15,000 cash for the
asset.
D NE NE
*Note to Instructor: If only cash capital expenditures are deducted, this
answer would be NE.
Copyright 2009 John Wiley & Sons, Inc. Kimmel, Financial Accounting, 5/e, Solutions Manual ( For Instructor Use Only) 12-39
BYP 12-1 FINANCIAL REPORTING PROBLEM
(a)Net cash provided by operating activities:
2007 $90,064
2006 $55,656
Some causes of the signifcant changes in net cash provided by operating
activities during 2007 were the decrease in the accounts receivable, a
decrease in inventories, and a decrease in income taxes payable and
deferred.
(b)The increase in cash and cash equivalents for the year ended
December 31, 2007 was $1,877,000.
(c)Tootsie Roll uses the indirect method of computing and presenting the
net cash provided by operating activities.
(d)According to the statement of cash fows, accounts receivable decreased
$2,591,000 in 2007. Inventories decreased $6,506,000 in 2007. Accounts
payable (and accrued liabilities) decreased $3,234,000 in 2007.
(e)The net cash used by investing activities in 2007 was $43,345,000.
(f) The supplemental disclosure of cash fow information disclosed interest
paid of $537,000 and income taxes paid of $11,343,000 in 2007.
12-40 Copyright 2009 John Wiley & Sons, Inc. Kimmel, Financial Accounting, 5/e, Solutions Manual ( For Instructor Use Only)
BYP 12-2 COMPARATIVE ANALYSIS PROBLEM
(a) Hershey Tootsie Roll
1.Current cash
debt coverage
ratio
$778,836
($1,618,770+$1,453,538)2
= .51 times
$90,064
($57,972+$62,211)2
= 1.50 times
2.Cash debt
coverage ratio
$778,836
($3,623,593+$3,474,142)2
= .22 times
$90,064
($174,495*+$160,958**)2
=
.54 times
**$57,972 + $116,523
**$62,211 + $98,747
(b)Tootsie Rolls current cash debt coverage ratio provides a ratio of $1.50 of
cash from operations for every dollar of current debt. It is a better rep-
resentation of liquidity on an average day than the current ratio. Tootsie
Rolls higher ratio (1.50 vs. .51) indicates Tootsie Roll was signifcantly more
liquid in 2007 than Hershey but both measures are acceptable.
The cash debt coverage ratio shows a companys ability to repay its
liabilities from cash generated from operating activities without having to
liquidate the assets employed in its operations. Since Tootsie Rolls cash
debt coverage ratio was more than twice as large (.54 vs. .22)
as Hersheys, Tootsie Rolls ability to repay liabilities with cash from
operations was signifcantly greater than Hersheys in 2007.
Copyright 2009 John Wiley & Sons, Inc. Kimmel, Financial Accounting, 5/e, Solutions Manual ( For Instructor Use Only) 12-41
BYP 12-3 RESEARCH CASE
(a)The article suggests that most people arent concerned about Searss
liquidity. Instead, the concern is that the company wont have adequate
cash to implement the changes it needs to make a return to proftability.
Also, some investors were concerned that a cash shortage will reduce
Searss ability to carry out the treasury stock buyback program that it
had previously announced.
(b) At the time of the article, Sears had not reported its cash fow numbers. It
had, however, reported an estimate that by the end of the quarter the
company would have $1 billion in cash on hand. This was lower that
analysts had expected. Based upon estimates of amounts that the
company had spent on treasury stock, debt repayment, and capital
expenditures, analysts determined that it was likely that, to arrive at
$1 billion in cash on hand, the companys cash fow must have declined.
(c)Individuals who tried to defend Sears said that they thought it was
inappropriate to make such negative statements about the company
based on estimates. They suggested it would be better to wait until the
company reports its actual cash fow numbers before evaluating the
company.
(d)The article suggests that, if, in fact, Searss cash fow is declining, it is a
bad time of year for that to be happening. Normally the fourth quarter would
be a period when cash fows would be strong, because of the holiday
shopping season. In contrast, Sears frequently experiences negative cash
from operations during the frst three quarters of the year.
12-42 Copyright 2009 John Wiley & Sons, Inc. Kimmel, Financial Accounting, 5/e, Solutions Manual ( For Instructor Use Only)
BYP 12-4 INTERPRETING FINANCIAL STATEMENTS
(a)Current ratio2001:$1,207.9$ 921.4= 1.31
2004:$2,539.4$1,620.4= 1.57
Current cash debt
coverage ratio2001:($119.8)$ 948.2= (.13) times
2004: $566.6$1,436.6= .39 times
Both Amazons current ratio and its current cash debt coverage ratio
improved dramatically from 2001 to 2004. Amazons current ratio in-
creased by 20% (from 1.31 to 1.57) during the 3-year period. In addition
Amazons current cash debt coverage ratio improved by $.52 per dollar of
current liabilities (from a negative $.13 per dollar in 2001 to a positive $.39
per dollar in 2004). Amazons liquidity improved greatly from 2001 to
2004.
(b)Cash debt
coverage ratio2001:($119.8)$3,090.0= (.04) times
2004: $566.6$4,773.4= .12 times
Debt to total
assets ratio2001:$3,077.5$1,637.5= 1.88
2004:$5,096.1$3,248.5= 1.57
Amazons solvency also improved signifcantly from 2001 to 2004. Its
cash debt coverage ratio increased by $.16 per dollar of total liabilities
during the 3-year period. Amazons debt to total assets ratio also im-
proved (decreased) by 16% from 2001 to 2004.
(c)Free cash fow2001:($119.8)$50.3 $0= ($170.1)
2004: $566.6$89.1 $0= $477.5
Amazons free cash fow increased by almost $650 million from 2001
to 2004. The increase was caused by Amazon fnally generating a proft in
2004. If Amazon is able to continue operating at a proft and producing a
large free cash fow, it should be able to fnance an expansion of its
operations.
Copyright 2009 John Wiley & Sons, Inc. Kimmel, Financial Accounting, 5/e, Solutions Manual ( For Instructor Use Only) 12-43
BYP 12-4 (Continued)
(d)While these measures tell us a lot about Amazon.com, they dont tell us
whether the stock price is reasonable. Amazon.coms high stock price is a
refection of a belief by investors that Amazon.com will continue to grow
incredibly fast. If this growth falters, its stock price will fall rather quickly.
Also, Amazon.coms heavy reliance on debt fnancing compounds the risk
of investing in its stock because it may have a difcult time paying its
debts if its growth does not continue.
12-44 Copyright 2009 John Wiley & Sons, Inc. Kimmel, Financial Accounting, 5/e, Solutions Manual ( For Instructor Use Only)
BYP 12-5 FINANCIAL ANALYSIS ON THE WEB
Answers will vary depending on the company chosen by the student.
Copyright 2009 John Wiley & Sons, Inc. Kimmel, Financial Accounting, 5/e, Solutions Manual ( For Instructor Use Only) 12-45
BYP 12-6 DECISION MAKING ACROSS THE ORGANIZATION
(a) DEVITO COMPANY
Statement of Cash Flows
For the Year Ended January 31, 2010
Cash fows from operating activities
Net loss.................................................... $(35,000)*
Adjustments to reconcile net income
to net cash provided by operating
activities
Depreciation expense..................... $55,000
Gain from sale of investment......... (5,000 ) 50,000
Net cash provided by operating
activities ....................................... 15,000
Cash fows from investing activities
Sale of investment.................................. 80,000
Purchase of investment......................... (75,000)
Purchase of fxtures and equipment..... (320,000)
Net cash used by investing
activities ....................................... (315,000)*
Cash fows from fnancing activities
Sale of capital stock............................... 405,000
Purchase of treasury stock................... (10,000)
Net cash provided by fnancing
activities ....................................... 395,000
Net increase in cash...................................... 95,000
Cash at beginning of period.......................... 140,000
Cash at end of period.................................... $235,000
Noncash investing and fnancing activities
Issuance of note for truck...................... $20,000
12-46 Copyright 2009 John Wiley & Sons, Inc. Kimmel, Financial Accounting, 5/e, Solutions Manual ( For Instructor Use Only)
BYP 12-6 (Continued)
*Computation of net income (loss)
Sales of merchandise................................ $385,000
Interest revenue......................................... 6,000
Gain on sale of investment
($80,000 $75,000) ................................. 5,000
Total revenues and gains.................. 396,000
Merchandise purchased............................ $258,000
Operating expenses
($170,000 $55,000) ............................... 115,000
Depreciation............................................... 55,000
Interest expense........................................ 3,000
Total expenses................................... 431,000
Net loss....................................................... $ (35,000)
(b)From the information given, it appears that from an operating standpoint,
Devito Company did not have a superb frst year, having suffered a
$35,000 net loss. Jill is correct; the statement of cash fows is not
prepared in correct form. The sources and uses format is no longer the
acceptable form. The correct format classifes cash fows from three
activitiesoperating, investing, and fnancing; and it also presents sig-
nifcant noncash investing and fnancing activities in a separate schedule.
Jill is wrong, however, about the actual increase in cash not being
$95,000; $95,000 is the correct increase in cash.
Copyright 2009 John Wiley & Sons, Inc. Kimmel, Financial Accounting, 5/e, Solutions Manual ( For Instructor Use Only) 12-47
BYP 12-7 COMMUNICATION ACTIVITY
MEMO
To: Rick Darman
From: Student
Re: Statement of cash fows
The statement of cash fows provides information about the cash receipts and
cash payments of a frm, classifed as operating, investing, and fnancing
activities. The operating activities section of the companys statement of cash
fows shows that cash increased by $172,000 as a result of transactions which
afected net income. This amount is computed by adjusting net income for those
items which afect net income, but do not afect cash, such as sales on account
which remain uncollected at year-end.
The investing activities section of the statement reports cash fows resulting from
changes in investments and other long-term assets. The company had a cash
outfow from investing activities due to purchases of buildings and equipment.
The fnancing activities section of the statement reports cash fows resulting
from changes in long-term liabilities and stockholders equity. The company
had a cash infow from fnancing activities due to the issuance of common
stock and an outfow due to the payment of cash dividends.
If you have any further questions, please do not hesitate to contact me.
12-48 Copyright 2009 John Wiley & Sons, Inc. Kimmel, Financial Accounting, 5/e, Solutions Manual ( For Instructor Use Only)
BYP 12-8 ETHICS CASE
(a)The stakeholders in this situation are:
Albert Roland, president of Christy Automotive Corporation.
George Ellerby, controller.
The Board of Directors.
The stockholders of Christy Automotive Corporation.
(b)The presidents statement, We must get that amount above $1 million,
puts undue pressure on the controller. This statement along with his
statement, I know you wont let me down George, encourages George to
do something unethical.
Controller George Ellerbys reclassifcation (intentional misclassifcation) of
a cash infow from a long-term note (fnancing activity) issuance to an
increase in payables (operating activity) is inappropriate and
unethical.
(c)It is unlikely that any board members (other than board members who are
also ofcers of the company) would discover the misclassifcation. Board
members generally do not have detailed enough knowledge of their
companys transactions to detect this misstatement. It is possible that an
ofcer of the bank that made the loan would detect the misclassifcation
upon close reading of Christy Automotive Corporations statement of
cash fows. It is also possible that close scrutiny of the balance sheet
showing an increase in notes payable (long-term debt) would reveal that
there is no comparable fnancing activity item (proceeds from note payable)
in the statement of cash fows.
Copyright 2009 John Wiley & Sons, Inc. Kimmel, Financial Accounting, 5/e, Solutions Manual ( For Instructor Use Only) 12-49
BYP 12-9 ALL ABOUT YOU ACTIVITY
(a)The article describes three factors that determine how much money you
should set aside. (1) Your willingness to take risk. You need to evaluate how
willing you are to experience wide swings in your fnancial position. (2) Your
needs. Your need to carefully evaluate your situation and evaluate the
possibility of various events and what the fnancial implications would be.
This is also impacted by the number of dependents you have. (3) Your
upcoming expenses. Here you need to look further out into the horizon and
consider the implications of larger events such as a big trip, a wedding, or
education costs.
(b)They recommend having at least three months of living expenses set
aside, and up to six months.
(c)Responses to this question will vary. What is most important is that
students begin the process of considering their cash needs and
developing a plan to set aside enough money to provide a cushion in the
event of a fnancial hiccup.
12-50 Copyright 2009 John Wiley & Sons, Inc. Kimmel, Financial Accounting, 5/e, Solutions Manual ( For Instructor Use Only)