Session 4 - Solutions

Session 4 - Solutions - General Mills - Indirect Cash Flow...

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General Mills - Indirect Cash Flow Net income 526.7 Add: Depreciation 194.2 Add/Subtract: Changes in WC Net Income Amount that Includes Cash NI > OCF Accounts Receivable (95.5) 6,246.1 Credit Sales 6,150.6 Inflow 95.5 Inventory (37.0) (2,593.5) COGS (2,630.5) Outflow 37.0 Prepaid Expense 62.8 (1,022.8) (960.0) Outflow (62.8) Accounts Payable 54.3 (2,630.5) **Expense (2,576.2) **Outflow (54.3) Accrued Liabilities 18.2 (1,318.2) (1,300.0) Outflow (18.2) Taxes Payable (13.5) (304.0) Tax Exp (317.5) Outflow 13.5 Other Liabilities (13.3) 0.0 (13.3) Outflow 13.3 Cash from operating: 696.9
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AT Cross 1.) Is their warranty a one year warranty or longer (Hint: look at the balance sheet)? As of December 31, 1997 and 1998, how much of a liability had AT Cross accrued for future warranty costs? 1998: 5,821,000 1997: 5,821,000 2.) Indicate which accounts are affected when the warranty provision is created. When should/does this occur? Increase Provision for Warranty Costs / Increase Accrued Warranty Costs Provision for Warranty Costs 330,910 Accrued Warranty Costs 330,910 Also, see Note A for their accounting treatment of Warranty Costs 3.) When a warranty claim is made and A.T. Cross incurs the cost, how will the income statement and balance sheet be impacted? IS - no effect BS - Reduce Cash / Reduce Accrued Warranty Costs Accrued Warranty Costs 330,910 Cash 330,910 4.) Identify how warranty costs appear on the cash flow statements. How much did A.T. Cross pay in 1997 and 1998 to fix dfective merchandise? An adjustment to remove non-cash expenses (1998: 330, 910; 1997: 742,764) The actual cash outflows for warrant claims also shows up (1998: 330,910; 1997: 430,764) 5.) Compare the cash and accrual for warranties in 1997 and 1998 and discuss what this tells us about the business/management. 1998 1997 Cash 330,910 430,764 Accrual 330,910 742,765 Diff 0 -312,001 SALES 156 MM 156 MM COGS 85 MM 81 MM NI -5.4 MM -6.7 MM Since ‘Accrued Warranty Costs’ on the balance sheet is not classified as a current liability, the warranty offered by A.T. Cross appears to be for longer than one year. Also, footnote A (Warranty Costs) states that the writing instruments have an unlimited warranty against mechanical failure. When a claim is made and A.T. Cross pays to fix the pen, the income
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This note was uploaded on 10/07/2011 for the course ACTG 500 taught by Professor Staff during the Fall '08 term at Ill. Chicago.

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Session 4 - Solutions - General Mills - Indirect Cash Flow...

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