List the errors you find in the following statement of cash flows. The cash balance at the beginning of the year Shasta Inc

List the errors you find in the following statement of cash flows. The cash balance at the beginning of the year was $240,000. All other amounts are correct, except the cash balance at the end of the year.


Shasta Inc.
Statement of Cash Flows
For the Year Ended December 31, 2014
Cash flows from operating activities:
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $360,000
Adjustments to reconcile net income to net
cash flow from operating activities:
Depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100,800
Gain on sale of investments . . . . . . . . . . . . . . . . . . . . . . . . . . 17,280
Changes in current operating assets and liabilities:
 Increase in accounts receivable . . . . . . . . . . . . . . . . . . . . . 27,360
 Increase in inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (36,000)
 Increase in accounts payable . . . . . . . . . . . . . . . . . . . . . . . (3,600)
 Decrease in accrued expenses payable . . . . . . . . . . . . . . (2,400)
Net cash flow from operating activities . . . . . . . . . . . . . . . . . . . $ 463,440
Cash flows from investing activities:
Cash received from sale of investments . . . . . . . . . . . . . . . . . . . $240,000
Less: Cash paid for purchase of land . . . . . . . . . . . . . . . . . . . . . . $259,200
 Cash paid for purchase of equipment . . . . . . . . . . . . . . . 432,000 691,200
Net cash flow used for investing activities . . . . . . . . . . . . . . . . (415,200)
Cash flows from financing activities:
Cash received from sale of common stock . . . . . . . . . . . . . . . . $312,000
Cash paid for dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 132,000
Net cash flow from financing activities . . . . . . . . . . . . . . . . . . . 180,000
Increase in cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 47,760
Cash at the end of the year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 192,240
Cash at the beginning of the year . . . . . . . . . . . . . . . . . . . . . . . . . . . $240,000


Answer:
1. The increase in accounts receivable should be deducted from net income in the Cash Flows from Operating Activities section.
2. The gain on the sale of investments should be deducted from net income in the Cash Flows from Operating Activities section.
3. The increase in accounts payable should be added to net income in the Cash Flows from Operating Activities section.
4. The correct amount of cash at the beginning of the year, $240,000, should be added to the increase in cash.
5. The final amount should be the amount of cash at the end of the year, $350,160.
6. The final amount of net cash flow from operating activities is $381,360.
7. The “cash paid for dividends” should be preceded by “Less:”.


A correct statement of cash flows would be as follows:
SHASTA INC.
Statement of Cash Flows
For the Year Ended December 31, 2014
Cash flows from operating activities:
Net income $360,000
Adjustments to reconcile net income to
net cash flow from operating activities:
Depreciation 100,800
Gain on sale of investments (17,280)
Changes in current operating assets
and liabilities:
Increase in accounts receivable (27,360)
Increase in inventories (36,000)
Increase in accounts payable 3,600
Decrease in accrued expenses
payable (2,400)
Net cash flow from operating activities $ 381,360
Cash flows from investing activities:
Cash received from sale of investments $240,000
Less: Cash paid for purchase of land $259,200
Cash paid for purchase of equip. 432,000 691,200
Net cash flow used for investing activities (451,200)
Cash flows from financing activities:
Cash received from sale of common stock $312,000
Less: Cash paid for dividends 132,000
Net cash flow from financing activities 180,000
Increase in cash $ 110,160
Cash at the beginning of the year 240,000
Cash at the end of the year $ 350,160

The cost of merchandise sold for Kohl’s Corporation for a recent year was $15,480 million

The cash flows from operating activities are reported by the direct method on the statement of cash flows. Determine the following:

a. If sales for the current year were $753,500 and accounts receivable decreased by $48,400 during the year, what was the amount of cash received from customers?
b. If income tax expense for the current year was $50,600 and income tax payable decreased by $5,500 during the year, what was the amount of cash payments for income taxes?
c. Briefly explain why the cash received from customers in (a) is different than sales.


Answer:

a. Sales……………………………………………………………………………………… $753,500
Plus decrease in accounts receivable balance…………………………………… 48,400
Cash received from customers……………………………………………………… $801,900
b. Income tax expense…………………………………………………………………… $ 50,600
Plus decrease in income tax payable……………………………………………… 5,500
Cash payments for income taxes…………………………………………………… $ 56,100
c. Because the customer paid more than the amount of sales for the period,
cash received from customers exceeded sales made on account by
$48,400 during the current year.



The cost of merchandise sold for Kohl’s Corporation for a recent year was $15,480 million. The balance sheet showed the following current account balances (in millions):


Balance,
End of Year
Balance,
Beginning of Year
Merchandise inventories $4,050 $3,420
Accounts payable 1,494 1,260


Determine the amount of cash payments for merchandise.


Answer:

Cost of merchandise sold*………………………………………………………………… $15,480
Add increase in merchandise inventories……………………………………………… 630
Deduct increase in accounts payable…………………………………………………… (234)
Cash paid for merchandise………………………………………………………………… $15,876
*In millions

Selected data taken from the accounting records of Ginis Inc. for the current year ended December 31 are as follows

Selected data taken from the accounting records of Ginis Inc. for the current year ended December 31 are as follows:


Balance,
December 31
Balance,
January 1
Accrued expenses payable (operating expenses) $ 12,650 $ 14,030
Accounts payable (merchandise creditors) 96,140 105,800
Inventories 178,020 193,430
Prepaid expenses 7,360 8,970


During the current year, the cost of merchandise sold was $1,031,550, and the operating expenses other than depreciation were $179,400. The direct method is used for presenting the cash flows from operating activities on the statement of cash flows. Determine the amount reported on the statement of cash flows for (a) cash payments for merchandise and (b) cash payments for operating expenses.


Answer:

a. Cost of merchandise sold…………………………………………………………… $1,031,550
Add decrease in accounts payable………………………………………………… 9,660
$1,041,210
Deduct decrease in inventories……………………………………………………… (15,410)
Cash payments for merchandise…………………………………………………… $1,025,800
b. Operating expenses other than depreciation…………………………………… $179,400
Add decrease in accrued expenses payable……………………………………… 1,380
$180,780
Deduct decrease in prepaid expenses……………………………………………… (1,610)
Cash payments for operating expenses…………………………………………… $179,170

Sweeter Enterprises Inc. has cash flows from operating activities of $539,000. Cash flows used for

Sweeter Enterprises Inc. has cash flows from operating activities of $539,000. Cash flows used for investments in property, plant, and equipment totaled $210,000, of which 75% of this investment was used to replace existing capacity.

a. Determine the free cash flow for Sweeter Enterprises Inc.
b. How might a lender use free cash flow to determine whether or not to give Sweeter Enterprises Inc. a loan?


Answer:

a. Cash flows from investment in PPE………………………………………………… $210,000
Replacement percentage……………………………………………………………… 75%
Cash paid for maintaining property, plant, and equipment…………………… $157,500
Cash flows from operating activities………………………………………………… $539,000
Less cash paid for maintaining property, plant, and equipment……………… 157,500
Free cash flow…………………………………………………………………………… $381,500

b. Free cash flow is often used to measure the financial strength of a business. The
more free cash flow that a business has, the easier it will be for the company to
pay the interest on the loan and repay the loan principal. Sweeter’s free cash flow
is $381,500, which is very strong.





The income statement of Booker T Industries Inc. for the current year ended June 30 is as follows:


Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $511,000
Cost of merchandise sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 290,500
Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $220,500
Operating expenses:
Depreciation expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 39,200
Other operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 105,000
Total operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . 144,200
Income before income tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 76,300
Income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21,700
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 54,600
Changes in the balances of selected accounts from the beginning to the end of the
current year are as follows:
Increase
Decrease*
Accounts receivable (net) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $11,760*
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,920
Prepaid expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,780*
Accounts payable (merchandise creditors) . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,980*
Accrued expenses payable (operating expenses) . . . . . . . . . . . . . . . . . . . . . 1,260
Income tax payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,660*


a. Prepare the Cash Flows from Operating Activities section of the statement of cash flows, using the direct method.
b. What does the direct method show about a company’s cash flows from operating activities that is not shown using the indirect method?


Answer:

a. Cash flows from operating activities:
Cash received from customers………………… $522,760
1
Deduct: Cash payments for merchandise… $302,400
2
Cash payments for operating
expenses……………………………… 99,9603
Cash payments for income taxes… 24,360 426,720
Net cash flow from operating activities……… $ 96,040
Computations:
1. Sales……………………………………………………………… $511,000
Add decrease in accounts receivable……………………… 11,760
Cash received from customers……………………………… $522,760
2. Cost of merchandise sold…………………………………… $290,500
Add: Increase in inventories………………………………… $3,920
Decrease in accounts payable………………………… 7,980 11,900
Cash payments for merchandise…………………………… $302,400
3. Operating expenses other than depreciation…………… $105,000
Deduct: Decrease in prepaid expenses…………………… $3,780
Increase in accrued expenses
payable……………………………………………… 1,260 5,040
Cash payments for operating expenses…………………… $ 99,960
4. Income tax expense…………………………………………… $ 21,700
Add decrease in income tax payable……………………… 2,660
Cash payments for income taxes…………………………… $ 24,360
b. The direct method directly reports cash receipts and payments. The cash received
less the cash payments is the net cash flow from operating activities. Individual
cash receipts and payments are reported in the Cash Flows from Operating
Activities section.
The indirect method adjusts accrual-basis net income for revenues and expenses
that do not involve the receipt or payment of cash to arrive at cash flows from
operating activities.

The income statement for Rhino Company for the current year ended June 30 and balances of selected

The income statement for Rhino Company for the current year ended June 30 and balances of selected accounts at the beginning and the end of the year are as follows:




Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $445,500
Cost of merchandise sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 154,000
Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $291,500
Operating expenses:
Depreciation expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 38,500
Other operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 115,280
Total operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 153,780
Income before income tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $137,720
Income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39,600
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 98,120
End
of Year
Beginning
of Year
Accounts receivable (net) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $36,300 $31,240
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 92,400 80,300
Prepaid expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14,520 15,840
Accounts payable (merchandise creditors) . . . . . . . . . . . . . . . . . . . . . 67,540 62,700
Accrued expenses payable (operating expenses) . . . . . . . . . . . . . . . 19,140 20,900
Income tax payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,400 4,400

Prepare the Cash Flows from Operating Activities section of the statement of cash flows, using the direct method.


Answer:

Cash flows from operating activities:
Cash received from customers……………………… $440,4401
Deduct: Cash payments for merchandise………… $161,2602
Cash payments for operating
expenses…………………………………… 115,7203
Cash payments for income taxes……… 39,600 316,580
Net cash flow from operating activities…………… $123,860
Computations:
1. Sales……………………………………………………………………………………… $445,500
Deduct increase in accounts receivable…………………………………………… 5,060
Cash received from customers……………………………………………………… $440,440
2. Cost of merchandise sold…………………………………………………………… $154,000
Add increase in inventories…………………………………………………………… 12,100
$166,100
Deduct increase in accounts payable……………………………………………… 4,840
Cash payments for merchandise…………………………………………………… $161,260
3. Operating expenses other than depreciation……………………………………… $115,280
Add decrease in accrued expenses payable……………………………………… 1,760
$117,040
Deduct decrease in prepaid expenses……………………………………………… 1,320
Cash payments for operating expenses…………………………………………… $115,720

The financial statements for Nike, Inc., are provided in Appendix C at the end of the text.

The financial statements for Nike, Inc., are provided in Appendix C at the end of the text.

a. Determine the free cash flow for the most recent fiscal year. Assume that 90% of the additions to property, plant, and equipment were used to maintain productive capacity.
b. How might a lender use free cash flow to determine whether or not to give Nike, Inc., a loan?
c. Would you feel comfortable giving Nike a loan, based on the free cash flow calculated in (a)?


Answer:

a.
Recent Fiscal Year End
(all numbers in thousands)
Cash flows from investment in PPE…………………………… $432
Replacement percentage………………………………………… 90%
Cash paid for maintaining PPE…………………………………… $389
Cash flows from operating activities…………………………… $1,812
Less cash paid for maintaining PPE…………………………… (389)
$1,423
b. Free cash flow is often used to measure the financial strength of a business. The
more free cash flow that a business has, the easier it will be for the company to
pay the interest on the loan and repay the loan principal.
c. Yes. Nike’s free cash flow is extremely strong, and is 3.7 times greater than the
capital expenditures necessary to maintain capacity.






Lovato Motors Inc. has cash flows from operating activities of $720,000. Cash flows used for investments in property, plant, and equipment totaled $440,000, of which 85% of this investment was used to replace existing capacity.

Determine the free cash flow for Lovato Motors Inc.


Answer:

Cash flows from investment in PPE…………………………………………… $440,000
Replacement percentage…………………………………………………………… 85%
Cash paid for maintaining PPE…………………………………………………… $374,000
Net cash flow from operating activities………………………………………… $720,000
Less investments in fixed assets to maintain current
production…………………………………………………………………………… 374,000
Free cash flow………………………………………………………………………… $346,000