Log in
HomeClass Notes1,200,000CA670,000

ACTG 3000 Lecture Notes - Lecture 3: Earnings Before Interest And Taxes, Cash Flow Statement, Cash Flow

67 views3 pages
tancod376
1 Dec 2017
School
York University
Department
Accounting
Course
ACTG 3000
Professor
Kiridaran Giri Kanagaretnam

For unlimited access to Class Notes, a Class+ subscription is required.

Document Summary

This generally includes actual cash on hand (i. e. , kept in a bank account) and cash equivalents (short-term deposits and securities). Investments that are readily convertible to a known amount of cash with no significant risk of change in value are included in cash equivalents. Overdrafts are included when the balance fluctuates regularly from positive to negative: cash from operations differs from net income as the latter is affected by accounting policy choices (i. e. , when to recognize revenues, expenses, assets, and liabilities). However, cash flows are not affected by accounting policy choices. Net income is based on the accrual concept and cash flow from operations is based on receipts and disbursements. Page 202: amortization is added in deriving cash flow from operations from a starting point of net operating income because it is a non-cash expense deducted in the determination of net income. It is not a (cid:683)(cid:660)(cid:656)(cid:662)(cid:659)(cid:644)(cid:646) (cid:656)(cid:647) (cid:647)(cid:662)(cid:655)(cid:645)(cid:660),(cid:684) (cid:642)(cid:660) (cid:644)(cid:642)(cid:660)(cid:649) (cid:650)(cid:660) (cid:655)(cid:656)(cid:661) (cid:659)(cid:646)(cid:644)(cid:646)(cid:650)(cid:663)(cid:646)(cid:645) (cid:643)(cid:666) (cid:661)(cid:649)(cid:646) (cid:644)(cid:656)(cid:654)(cid:657)(cid:642)(cid:655)(cid:666) (cid:647)(cid:656)(cid:659) (cid:661)(cid:649)(cid:646) (cid:642)(cid:654)(cid:656)(cid:659)(cid:661)(cid:650)(cid:667)(cid:642)(cid:661)(cid:650)(cid:656)(cid:655).

Get access

Grade+
$40 USD/m
Billed monthly
Grade+
Homework Help
Study Guides
Textbook Solutions
Class Notes
Textbook Notes
Booster Class
10 Verified Answers
Class+
$30 USD/m
Billed monthly
Class+
Homework Help
Study Guides
Textbook Solutions
Class Notes
Textbook Notes
Booster Class
7 Verified Answers

Related Documents

ACTG 3000
Final Exam
Study Guide
ACTG 3000 Study Guide - Midterm Guide: Nopat, Cash Flow, Business Analysis
ceruleanduck709
ACTG 3000 Chapter Notes - Chapter 7: Abnormal Return, Savings Account, Free Cash Flow
limegoldfish227
ACTG 3000 Chapter Notes - Chapter 7: Dividend Discount Model, Discounted Cash Flow, Stock Valuation
turquoiseplatypus626

Related Questions

1. A creditor is reviewing Hoffman Electronics’ statements ofretained earnings for the last 3 years. The creditor is trying todetermine whether a substantial loan should be given to HoffmanElectronics. Which question will most likely be answered byreviewing the statement of retained earnings?

a. Does Hoffman Electronics make risky investments that impedethe cash flow of the firm?

b. What was the ending permanent account balance for HoffmanElectronics last quarter?

c. What assets owned by Hoffman Electronics are valuable enoughto cover debt repayment?

d. Does Hoffman Electronics have enough earnings to pay bothdividends and debts?

2. True or false. By reviewing a company’s statement of retainedearnings over multiple reporting periods, an investor can evaluatethe company’s future growth potential based on net incomechanges.

3. A creditor would most likely be interested in reviewing afirm’s statement of retained earnings to determine if the firm

a. exhibits liquidity.

b.can repay its debt obligations.

c.makes risky investments.

d.has sufficient receivables.

4. On statement of cash flow, the repayment of loans iscategorized as a cash flow from ____activities.

a. operating

b. financing

5."Fill in the blank" question: select the correct answer.

In a statement of cash flows, cash inflows that result fromproviding goods to customers are included in the section called“cash flows from_______ activities.

a. investing

b. operating

c. sales

d. investing

6. Creditors want to know whether Photon, Inc. uses itsavailable cash to purchase new equipment. Which section of thestatement of cash flows would provide this information?

a.Cash flows from operating activities

b.Cash flows from sales activities

c.Cash flows from financing activities

d.Cash flows from investing activities

7. Creditors are examining the statement of cash flows forPhoton, Inc. Which of the following questions can be answered byreviewing the statement of cash flows?

a. What is the average net income of Photon?

b.What type of assets does Photon possess?

c.Does Photon reset its temporary accounts?

d.Does Photon pay its bills when they are due?

Issa Manufacturing Company was started on January 1, 2014, when it acquired $88,000 cash by issuing common stock. Issa immediately purchased office furniture and manufacturing equipment costing $9,200 and $31,600, respectively. The office furniture had a seven-year useful life and a zero salvage value. The manufacturing equipment had a $3,200 salvage value and an expected useful life of four years. The company paid $11,000 for salaries of administrative personnel and $15,900 for wages to production personnel. Finally, the company paid $12,690 for raw materials that were used to make inventory. All inventory was started and completed during the year. Issa completed production on 4,300 units of product and sold 3,310 units at a price of $16 each in 2014. (Assume that all transactions are cash transactions.)

Determine the amount of total assets that would appear on the December 31, 2014, balance sheet. (Round your answer to the nearest dollar amount.)

Determine the amount of net cash flow from operating activities that would appear on the December 31, 2014 statement of cash flows. (List cash outflow as negative amount.)

Determine the amount of net cash flow from investing activities that would appear on the December 31, 2014 statement of cash flows. (List cash outflow as negative amount.)

Comparative financial statement data for Carmono Company follow:
This Year Last Year
Assets
Cash $ 7.50 $ 14.00
Accounts receivable 50.00 43.00
Inventory 92.50 79.20
Total current assets 150.00 136.20
Property, plant, and equipment 231.00 194.00
Less accumulated depreciation 45.60 34.20
Net property, plant, and equipment 185.40 159.80
Total assets $ 335.40 $ 296.00
Liabilities and Stockholders’ Equity
Accounts payable $ 55.50 $ 46.00
Common stock 118.00 91.00
Retained earnings 161.90 159.00
Total liabilities and stockholders’ equity $ 335.40 $ 296.00
For this year, the company reported net income as follows:
Sales $ 850.00
Cost of goods sold 510.00
Gross margin 340.00
Selling and administrative expenses 320.00
Net income $ 20.00

This year Carmono declared and paid a cash dividend. There were no sales of property, plant, and equipment during this year. The company did not repurchase any of its own stock this year.

Carmono CompanyStatement of Cash Flows - Indirect MethodFor This Year Ended December 31Operating activities:Net income$20.00Adjustments to convert net income to a cash basis:Depreciation$11.40Increase in accounts receivable(7.00)Increase in inventory(13.30)Increase in accounts payable9.500.60Net cash provided by operating activities20.60Investing activities:Increase in plant and equipment(37.00)Net cash used in investing activities(37.00)Financing activities:Increase in common stock27.00Cash dividends(17.10)Net cash provided by financing activities9.90Net decrease in cash(6.50)Beginning cash and cash equivalents14.00Ending cash and cash equivalents$7.50
2.

Compute Carmono’s free cash flow for this year. (Negative amount should be indicated by a minus sign. Round your intermediate calculations and final answer to 2 decimal places.)

Free cash flow$

3.

Changes in various accounts and gains and losses on the sale of assets during the year for Argon Company are given below:


Item Amount
Accounts receivable $ 79,000 decrease
Inventory $ 120,000 increase
Prepaid expenses $ 3,500 decrease
Accounts payable $ 41,000 decrease
Accrued liabilities $ 9,600 increase
Income taxes payable $ 15,700 increase
Sale of equipment $ 8,100 gain
Sale of long-term investments $ 12,200 loss


Required:

For each item, indicate whether the dollar amount should be added to or deducted from net income under the indirect method when computing the net cash provided by operating activities for the year.
Item Amount Effect
Accounts receivable
Inventory
Prepaid expenses
Accounts payable
Accrued liabilities
Income taxes payable
Sale of equipment
Sale of long-term investments

4.

Apex Company prepared the statement of cash flows for the current year that is shown below:


Apex Company
Statement of Cash Flows—Indirect Method
Operating activities:
Net income $ 41,500
Adjustments to convert net income to cash basis:
Depreciation $ 20,100
Increase in accounts receivable (61,500)
Increase in inventory (25,100)
Decrease in prepaid expenses 9,400
Increase in accounts payable 54,300
Decrease in accrued liabilities (10,100)
Increase in income taxes payable 3,300 (9,600)
Net cash provided by operating activities 31,900
Investing activities:
Proceeds from the sale of equipment 15,200
Loan to Thomas Company (41,900)
Additions to plant and equipment (121,800)
Net cash used for investing activities (148,500)
Financing activities:
Increase in bonds payable 88,800
Increase in common stock 38,700
Cash dividends (28,400)
Net cash provided by financing activities 99,100
Net decrease in cash (17,500)
Beginning cash balance 27,200
Ending cash balance $ 9,700


Required:

Compute Apex Company’s free cash flow for the current year. (Negative amount should be indicated by a minus sign.)

Free Cash Flow

5.

For the just completed year, Hanna Company had net income of $95,000. Balances in the company’s current asset and current liability accounts at the beginning and end of the year were as follows:


December 31
End of Year Beginning of Year
Current assets:
Cash $ 59,000 $ 80,000
Accounts receivable $ 164,000 $ 184,000
Inventory $ 448,000 $ 346,000
Prepaid expenses $ 11,500 $ 15,000
Current liabilities:
Accounts payable $ 366,000 $ 392,000
Accrued liabilities $ 8,000 $ 13,000
Income taxes payable $ 32,000 $ 25,000

The Accumulated Depreciation account had total credits of $42,000 during the year. Hanna Company did not record any gains or losses during the year.


Required:

Use the indirect method to determine the net cash provided by (or used in) operating activities for the year. (List any deduction in cash and cash outflows as negative amounts.)