Chapter 5-solutions of assigned problems

Chapter 5-solutions of assigned problems - Chapter 5...

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Chapter 5 Reporting and Interpreting Cash Flows E5-3 1. – I Plant and equipment Cash 2. NE Inventory Accounts payable 3. + O Cash Accounts receivable 4. NE Salaries expense Accrued salaries payable 5. – O Interest expense Cash 6. – F Short-term debt Cash 7. – O Prepaid rent Cash 8. + I Cash Plant and equipment 9. – O Accounts payable Cash 10. – F Retained earnings Cash E5-6 Comparison of Cash flow statement direct and indirect reporting Cash flows Cash flow from operations (and related changes) Direct Indirect 1. Revenues from customers X 2. Accounts receivable increase or decrease X 3. Payments to suppliers X 4. Inventory increase or decrease X 5. Accounts payable increase or decrease X
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6. Payments to employees X 7. Wages payable, increase or decrease X 8. Amortization expense X The direct method reports cash flows from operating activities individually for each major revenue and expense. In contrast, the indirect method reports a reconciliation of net income to cash flow from operating activities. The two methods report the investing and financing activities in exactly the same way. E5-8 Req. 1 Cash flows from operating activities — indirect method Net loss. ..................................................................................................... ($8,000) Add (deduct) items not affecting cash: Amortization expense. ............................................................................... 7,300 Decrease in accounts receivable . ............................................................ 11,000 Increase in salaries payable. ..................................................................... 9,000 Decrease in unearned service revenue .................................................. (6,000) Net cash provided by operating activities. ...................................................... $13,300 Cash flows from operating activities—direct method Collections from customers ($50,000 + 11,000 – 6,000) $55,000 Payments for: Salaries ($42,000 - 9,000) $33,000 Utilities 7,000 Other 1,700 (41,700 ) Net cash provided by operating activities. ...................................................... $13,300 Req. 2 The reasons that caused Kane to report a net loss but positive cash flow are: (1) amortization expense, and (2) changes in non-cash working capital items. Amortization expense, along with decreased working capital requirements (current assets - current liabilities), turned the net loss into positive operating cash flow. The reasons for the difference between net income and cash flow are important because they help the financial analyst to determine if the trends are sustainable or whether they represent one-time events.
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E5-9 Req. 1 Cash flows from operating activities—indirect method Net loss. .................................................................................................... ($8,782) Add (deduct) items not affecting cash: Depreciation and amortization. ................................................................. 32,915
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This note was uploaded on 08/19/2008 for the course COMM 217 taught by Professor Smroz during the Summer '07 term at Concordia Canada.

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Chapter 5-solutions of assigned problems - Chapter 5...

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