Seminar 07 Week 08 - 0902

Seminar 07 Week 08 - 0902 - S OLUTIONS TO SELF STUDY...

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Unformatted text preview: S OLUTIONS TO SELF STUDY QUESTIONS 5. The advantage of the direct method is that it presents the major categories of cash receipts and cash payments in a format that is similar to the income statement and familiar to statement users. Its principal disadvantage is that the necessary data can be expensive and time-consuming to accumulate, although with advances in computers and information technology, this cost is of declining significance. The advantage of the indirect method is its reconciliation of profit to net cash provided by operating activities, while its primary disadvantage is the difficulty in understanding the adjustments that comprise the reconciliation. 7. A number of factors could have caused an increase in cash despite the loss for the period. These are: 1) (2) (3) (4) high cash revenues relative to low cash expenses sales of property, plant, and equipment sales of investments issue of debt or shares for cash. (a) (b) (c) The current cash debt coverage ratio is a cash-based ratio that measures liquidity. Solvency can be measured by the cash debt coverage ratio (cash-based). Profitability can be measured by the cash return on sales ratio. 10. Page 10 of 22 P roblem Set A 11.4 a) O’Reilly Ltd Statement of cash flows for the year ended 31 December 2009 Cash flows from operating activities Cash receipts from customers Cash payments To suppliers 199,000 For operating expenses 18,500 For interest expense 2,000 7,000 For income taxes Net cash provided by operating activities 236,000 226,500 9,500 Cash flows from investing activities Sale of Equipment Net cash provided by investing activities 8,500 8,500 Cash flows from financing activities Redemption of debentures Issue of share capital Payment of dividends Net cash provided by financing activities (6,000) 4,000 (2,000) (4,000) Net increase in cash Cash at beginning of period Cash at end of period 14,000 15,000 29,000 Calculation: Cash receipts from customers: Sales Deduct: Increase in accounts receivable Cash receipts from customers 250,000 (14,000) 236,000 Cash payments to suppliers: Cost of goods sold Deduct: Decrease in inventory Cost of purchases Deduct: Increase in accounts payable Cash payments to suppliers 210,000 (10,000) 200,000 (1,000) 199,000 Cash payments for operating expenses: Operating expenses Deduct: Depreciation* Cash payments for operating expenses 24,000 (5,500) 18,500 Cash payments for income taxes: Income tax expense Add: Decrease in income taxes payable Cash payments for income taxes 4,000 3,000 7,000 Page 11 of 22 Equip Sold Bal c/d Accumulated Depreciation* 9,500 Bal b/d 20,000 Dep Exp 29,500 24,000 5,500 29,500 b) O’Reilly Ltd Note to Statement of cash flows for the year ended 31 December 2009 Reconciliation of profit to cash provided by operating activities. Profit Adjustments to reconcile profit to net cash provided by operating activities: Depreciation expense Increase in accounts receivable Decrease in inventory Increase in accounts payable Decrease in income tax payable Net cash provided by operating activities Page 12 of 22 10,000 5,500 (14,000) 10,000 1,000 (3,000) (500) 9,500 P ROBLEM SET A 11.6 a) Henry’s Hats Ltd Statement of cash flows (partial) for the year ended 30 June 2009 Cash flows from operating activities Cash receipts from customers Cash payments To suppliers 5,380,000 For operating expenses 2,295,000 Net cash provided by operating activities Calculation: Cash receipts from customers: Sales Deduct: Increase in accounts receivable Cash receipts from customers (7,675,000) (425,000) 8,500,000 (400,000) 8,100,000 Cash payments to suppliers: Cost of purchases Deduct: Increase in accounts payable Cash payments to suppliers Cash payments for operating expenses: Operating expenses ($1,200,000 + $1,125,000) Add: Increase in prepaid expenses Deduct: Decrease in accrued expenses payable Cash payments for operating expenses 8,100,000 5,430,000 (50,000) 5,380,000 2,325,000 170,000 (200,000) (30,000) 2,295,000 b) Henry’s Hats Ltd Note to Statement of cash flows for the year ended 30 June 2009 Reconciliation of profit to cash provided by operating activities. Profit Adjustments to reconcile profit to net cash provided by operating activities: Depreciation expense Amortisation expense Increase in accounts receivable Increase in inventory Increase in prepaid expenses Increase in accounts payable Decrease in accrued expenses payable Net cash provided by operating activities Page 13 of 22 860,000 75,000 30,000 (400,000) (220,000) (170,000) 50,000 200,000 (435,000) 425,000 P roblem Set A 11.8 (Part C) c) Swan Lake Cruises Ltd 1) Current cash debt coverage 16,000 ÷ 44,000 * + 53,000 * * = .33 times 2 Calculation: *29,000 + 15,000 **33,000 + 20,000 2) 44,000 53,000 Cash return on sales ratio 16,000 ÷ 250,000 = 6.4% or .064:1 3) Cash debt coverage 16,000 ÷ 59,000 * + 63,000 * * = .26 times 2 Calculation: *29,000 + 15,000 + 15,000 **33,000 + 20,000 + 10,000 4) 59,000 63,000 Free cash flow 16,000 - 7,000 = 9,000 Page 14 of 22 P roblem Set B 11.5 a) George Ltd Statement of cash flows for the year ended 31 December 2009 Cash flows from operating activities Cash receipts from customers Cash payments To suppliers 104,290 For operating expenses 21,400 For interest expense 2,940 7,270 For income taxes Net cash provided by operating activities Cash flows from investing activities Purchase of P&E Sale of P&E Sale of Investments Net cash provided by investing activities 135,900 117,800 (141,000) 15,000 22,500 Cash flows from financing activities Proceeds from issue of bonds Issue of share capital Payment of dividends Net cash provided by financing activities 253,700 70,000 50,000 (75,000) (103,500) 45,000 59,300 33,400 92,700 Net increase in cash Cash at beginning of period Cash at end of period Calculation: Cash receipts from customers: Sales Deduct: Increase in accounts receivable Cash receipts from customers Cash payments to suppliers: Cost of goods sold Add: Increase in inventory Cost of purchases Deduct: Increase in accounts payable Cash payments to suppliers Cash payments for operating expenses: Operating expenses Add: Decrease in accrued expenses payable Cash payments for operating expenses Page 15 of 22 297,500 (43,800) 253,700 99,460 19,250 118,710 (14,420) 104,290 14,670 6,730 21,400 Bal b/d Purchase Plant & Equipment 205,000 141,000 346,000 Dividends Paid Bal c/d Retained Earnings 75,000 175,600 250,600 Equip Sold Bal c/d 36,000 310,000 346,000 Bal b/d 107,940 142,660 250,600 b) George Ltd Note to Statement of cash flows for the year ended 31 December 2009 Reconciliation of profit to cash provided by operating activities. Profit Adjustments to reconcile profit to net cash provided by operating activities: Depreciation expense Gain on sale of machinery Increase in accounts receivable Increase in inventory Increase in accounts payable Decrease in accrued expenses payable Net cash provided by operating activities Page 16 of 22 142,660 35,500 (5,000) (43,800) (19,250) 14,420 (6,730) (24,860) 117,800 P roblem Set B 11.10 (a) Michael Limited Statement of cash flows for the year ended 30 June 2010 Cash flows from operating activities Cash receipts from customers Cash payments To suppliers 4,423,000 For operating expenses 988,000 For interest expense 80,000 600,000 For income taxes Net cash provided by operating activities Cash flows from investing activities Sale of land Purchase of building Purchase of plant & equipment Sale of plant & equipment Purchase of office equipment Net cash provided by investing activities See (2) See (3) See (4) See (4) See (5) 6,984,000 (6,091,000) 893,000 320,000 (215,000) (348,000) 215,000 (25,000) (53,000) Cash flows from financing activities Proceeds from issue of shares Payment of dividends Proceeds from borrowings Net cash provided by financing activities See (6) See (7) See (8) 100,000 (375,000) 400,000 125,000 965,000 610,000 1,575,000 Net increase in cash Cash at beginning of period Cash at end of period Calculation: Cash receipts from customers: Sales Deduct: Increase in accounts receivable Deduct: Bad debts written off Cash receipts from customers Cash payments to suppliers: Cost of goods sold Add: Increase in inventory Cost of purchases Deduct: Increase in accounts payable Cash payments to suppliers See (1) 7,063,000 (70,000) (9,000) 6,984,000 4,438,000 110,000 4,548,000 (125 ,000) 4,423,000 Page 17 of 22 Operating expenses Other expenses Insurance expense Add: increase in prepaid insurance Add: decrease in accrued expenses Operating expenses 988,000 898,000 70,000 10,000 10,000 988,000 Cash payments for income taxes: Income tax expense (550,000 + 40,000) Add: decrease in income taxes payable Cash payments for income taxes 590,000 10,000 600,000 1 Write-off Bal c/d 2 Bal b/d Revaluation Allowance for doubtful debts 9,000 Bal b/d 30,000 39,000 Land 950,000 80,000 1,030,000 Land sold Bal c/d Proceeds from sale of land: Carrying value of land sold Gain from sale of land (from income statement) Proceeds from sale of land 3 Bal b/d Purchase 3a Bal c/d 4 Bal b/d Purchase 4a Building 835,000 215,000 1,050,000 215,000 815,000 1,030,000 215,000 105,000 320,000 Bal c/d Accumulated depreciation - building Bal b/d 270,000 Depreciation 270,000 Plant and equipment 629,000 348,000 977,000 25,000 39,000 P&E sold Bal c/d Accumulated depreciation – plant and equipment P&E sold 150,000 Bal b/d Bal c/d 220,000 Depreciation* 370,000 1,050,000 1,050,000 250,000 20,000 270,000 250,000 727,000 977,000 305,000 65,000 370,000 *In this question the accumulated depreciation accounts of both buildings and office equipment has to be reconstructed calculated first to ascertain the value of depreciation this year. Page 18 of 22 Depreciation expense (from income statement) Less: Accumulated depreciation – buildings Less: Accumulated depreciation – office equipment Accumulated depreciation – plant and equipment 125,000 20,000 40,000 65,000 Carrying value of plant and equipment sold Cost Accumulated depreciation Carrying value of plant and equipment sold 250,000 150,000 100,000 Proceeds from sale of plant and equipment: Carrying value of plant and equipment sold Gain from sale of equipment (from income statement) Proceeds from sale of plant and equipment 100,000 115,000 215,000 5 Bal b/d Purchase 5a Office equipment 190,000 25,000 215,000 Bal c/d Accumulated depreciation – office equipment Bal b/d Bal c/d 135,000 Depreciation 135,000 215,000 215,000 95,000 40,000 135,000 Share capital 6 Bal c/d 7 Cash dividend*(ii) Reserves** (i) Bal c/d 700,000 700,000 Retained earnings 425,000 50,000 135,000 135,000 Bal b/d Reval. reserve Cash 500,000 100,000 100,000 700,000 Bal b/d 809,000 Depreciation 1,048,000 1,857,000 *The cash dividend amount of $425,000 relates to the dividends that have been declared not necessarily the dividends that have been paid **The amount transferred to general reserves account needs to be reconstructed to ascertain the amount transferred from retained earnings before continuing to reconstruct the retained earnings account to ascertain the cash dividends paid General reserves i Bal c/d ii 150,000 150,000 Dividend payable Page 19 of 22 Bal b/d Retained earnings 100,000 50,000 150,000 Cash# Bal c/d 375,000 300,000 675,000 Bal b/d Retained earnings* 250,000 425,000 675,000 #This is the cash that has been paid to shareholders *This is the amount calculated from reconstructing the retained earnings account Borrowings 8 Bal c/d 1,500,000 1,500,000 Bal b/d Retained earnings 1,100,000 400,000 1,500,000 (b) Michael Limited Note to Statement of cash flows for the year ended 30 June 2010 Reconciliation of profit to cash provided by operating activities. Profit Adjustments to reconcile profit to net cash provided by operating activities: Depreciation expense Amortisation patents Gain on sale of land Gain on sale of equipment Increase in accounts receivable Increase in allowance for doubtful debts Increase in inventory Increase in prepaid insurance Increase in accounts payable Decrease in accrued expenses Increase in interest payable Decrease in income taxes payable Net cash provided by operating activities Page 20 of 22 1,048,000 125,000 10,000 (105,000) (115,000) (70,000) 5,000 (110,000) (10,000) 125,000 (10,000) 10,000 (10,000) (155,000) 893,000 ...
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