Solution-Final-W06

Solution-Final-W06 - COMM 217. 4 (W '06) FINAL EXAM,...

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COMM 217. 4 (W ’06) FINAL EXAM, SUGGESTED SOLUTION Question (1) – Suggested Solution (15 marks) 1. C 2. A 3. C 4. D 5. C 6. B 7. D 8. C 9. D 10. A
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Question (2) – Suggested Solution (a) Blueberry Inc. Statement of Cash Flows For the Year Ended December31, 2005 Operating activities Net Income $22,500(*) Items not affecting cash: Amortization expense 16,000 (**) Increase in Accounts Receivable (30,000) Increase in Merchandise Inventory (46,000) Decrease in Prepaid Rent 2,000 Increase in Accounts Payable 5,000 Decrease in Salaries Payable (3,000) Increase in Interest Payable 8,000 Increase in Income Taxes Payable 9,000 Cash used in operating activities $(16,500) Investing activities Purchase of Equipment (80,000) Sale of Land 2,500 Cash used in investing activities (77,500) Financing activities Issuance of Bonds 60,000 Issuance of Share Capital 36,000 Payment of Dividends (10,000) Cash from financing activities 86,000 Net Change in Cash (8,000) Cash, Beginning of Year 20,000 Cash, End of Year $ 12,000 (*) Net Income = Change in Retained Earnings + Dividends = $12,500 + $10,000 = $22,500 (**) $125,000 - $109,000 = $16,000 (no disposals of equipment) (b) Cost of sales = (1- 40%) x $500,000 = $300,000. Purchases = $300,000+ $56,000 - $10,000 = $346,000. Payments to suppliers = $346,000 + $25,000 - $30,000= $341,000 .
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(c) Amortization is not a source of cash in any year. Amortization is a non-cash expense that must be added back o net income in order not to understate cash flows from operating activities. How might a potential lender use the cash flow statement? - Would be primarily interested in Blueberry’s ability to pay periodic interest and repay the principal at maturity. - Would review the cash flow statement to see whether sufficient cash from operations is being generated. In Blueberry’s case cash from operations was actually negative, i.e., cash was used in operations despite positive net income. This may be a signal that the quality of earnings is not strong. - Would evaluate how cash was used. Was cash used to grow the business, e.g., capital expenditures, or was it used mainly for other purposes, e.g., repay debt. In Blueberry’s case the company shows a significant capital expenditure ($80,000 to
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Solution-Final-W06 - COMM 217. 4 (W '06) FINAL EXAM,...

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