Horngrenfinancial accounting9esolutions5.docx
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Horngrenfinancial accounting9esolutions5.docx
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Horngrenfinancialaccounting9esolutions5
CHAPTER5
5-1No.Allpubliccompaniesreportitbecausethestatementofcashflowsisarequiredstatementwitharequiredformat.
5-2Acashflowstatementshowsthesourcesofchangesincashbalancesand:
a)aidsinpredictingfuturecashflowsandevaluatinghowmanagement'sdecisionsgenerateanduseofcash;
b)aidsindeterminingacompany'sabilitytopaydividendsandinterestandtopaydebtswhendue;
c)aidsinunderstandingandidentifyingchangesinthemixofproductiveassets.
5-3Cashequivalentsarehighly-liquid,short-terminvestmentsthatcanbeconvertedeasilytocashwithlittledelay.Examplesincludemoneymarketfundsandtreasurybills.
5-4Operatingactivities,investingactivities,andfinancingactivitiesarethethreemajortypesofactivitiessummarizedinthestatementofcashflows.
5-5Majoroperatingactivitiesinclude:
Collections
Payments
fromcustomers(forsales)
tosuppliers(forinventory)
frominvestees(interest÷nds)
toemployees(forwages)
tocreditors(interest)
togovernment(taxes)
5-6Majorinvestingactivitiesinclude:
a)salesandpurchasesofproperty,
b)salesandpurchasesofsecuritiesthatarelong-terminvestments,
c)makingandcollectinglong-termloans.
5-7Majorfinancingactivitiesinclude:
a)borrowingfrom(nontrade)creditors,
b)repaying(nontrade)creditors,
c)issuingequitysecurities,
d)repurchasingequitysecurities,and
e)payingdividends.
5-8Interestpaidorreceivedappearsintheoperatingactivitiessection.Somecommentatorsfavorshowinginterestpaidelsewheresinceitisassociatedwithfinancing.
5-9Onlyincreasinglong-termdebtincreasescash.Bothrepurchasingcommonsharesandpayingdividendsdecreasecash.
5-10Sellingfixedassetsforcashandcollectingaloanincreasecash.Purchasingequipmentdecreasescash.Purchasingfixedassetsbyissuingdebtdoesnotaffectcash,butitshouldbeshowninascheduleofnoncashinvestingandfinancingactivitiesthatispartofthestatementofcashflows.
5-11Whenliabilitiesincrease,thefirmhaseitherraisedcashandpromisedtopayitbacklaterorithaspreservedcashratherthanpayingitouttoreducegrowingaccountspayable.Somoreliabilitiesleadtomorecash.Likewise,increasesinnoncashassetsrequirecash.Eithercashisspenttogettheassetoranassetisrecordedinsteadofreceivingcash.
5-12Noncashinvestingandfinancingactivitiesgenerallycouldhavebeenaccomplishedidenticallyinsubstance(thoughnotinform)bycashtransactions.Forexample,issuingdebttopurchaseanassetcouldhavebeenaccomplishedbyissuingdebtforcashandthenusingthecashtopurchasetheasset.Companiesshouldnotbeabletopreventdisclosureofsuchatransactiontoreadersofthestatementofcashflowssimplybyusinganoncashformoftransaction.
5-13Thistransactionshouldnotbeshowninthebodyofthestatementofcashflowsbecauseitinvolvesnocashflows.However,itshouldbereportedinanaccompanyingschedule.Why?
Thetransactioncouldhavebeenaccomplishedbyissuingstockforcashandthenbuyingthefixedasset,wherebyitwouldbeinthestatementofcashflows.Readersofstatementsofcashflowsshouldbeinformedaboutsuchtransactions.
5-14Yes.Itisimportanttoknowoftheperiodicneedtopayoffandrefinancedebt.Companieswithlargeshort-termdebtlevelsoftenfinditaninexpensivewaytoborrow,butwheninterestratesriseoracompany'sfinancialconditionworsens,refinancingmaybebothdifficultandexpensive.
5-15Thedirectmethodandtheindirectmethodarethetwomajorwaysofcomputingnetcashflowfromoperatingactivities.
5-16Theinformationforthedirect-methodcashflowstatementcomesdirectlyfromentriesintoacompany’scashaccount.
5-17Therequiredadjustmentsaretoaddnoncashexpensesandlosses,deductnoncashrevenuesandgains,adddecreasesinoperatingassetsandincreasesinoperatingliabilities,anddeductincreasesinoperatingassetsanddecreasesinoperatingliabilities.
5-18Salesrevenueisrecognizedontheaccrualbasiswhenitisearnedandrealized,notwhencashisreceived.Therefore,cashcollectionsfromcustomerswillnotordinarilyequalsalesrevenueduringanygivenperiod.Sometimescashfromcustomersarrivesbeforeitisearned(creatingaliabilitytoperform)orafteritisearned(collectioneliminatesanaccountreceivable).
5-19Changesintheinventoryandaccountspayableaccountsexplainthedifferencebetweencostofgoodssoldandcashpaymentstosuppliers.
5-20Strictlyspeaking,netlosses,bythemselves,donotdraincash.Anetlossisanexcessofexpensesoverrevenues;itisanincomestatementitemratherthananitemonastatementofcashflows.Asanextremeexample,equipmentmaybesoldbelowitsbookvalueandcauseanetloss,butcashproceedsresultingfromthetransactionwouldbeanadditiontocash,notacashdrain.
5-21Cash+Noncashassets=Liabilities+Paid-incapital+Retainedearnings
Cash=Liabilities+Paid-incapital+Retainedearnings–Noncashassets
5-22Theerroneousimpressionisthatdepreciationisasourceofcashbecauseitisaddedtonetincometodeterminecashflowfromoperations.Depreciationisanallocationofanasset’soriginalcosttoexpensethatdoesnotentailacurrentcashoutlay;thatis,depreciationisanoncashexpense.Itisaddedtonetincomewhenusingtheindirectmethodonlytooffsetitsdeductionincomputingnetincome.
5-23Thenewsletterreinforcesthewidelyhelderroneousimpressionthatdepreciationprovidescash.Seethesolutionto5-22.
5-24Undertheindirectmethodofpreparation,depreciationisveryprominentinthecalculation,althoughnotdirectlyasourceofcash.Depreciationbelongsinasupportingschedulewhenusingthedirectmethod.Depreciationisoneoftheitemsthatreconcilesnetincometonetcashflowfromoperatingactivities.
5-25Profitablecompaniesoftenlackforcashbecausetheyaregrowingquicklyandmustacquireinventoryforfuturesaleswhilewaitingtocollectgrowingreceivablebalances.Newfirmsinindustriessuchascomputers,electronics,andbio-techmightexperiencethis.
5-26Large,non-cashexpensessuchasdepreciationcouldcausethis.Theairlineindustrymightbeagoodexample.
5-27Iwouldbeconcernedaboutthiscompany.Negativecashflowfromoperationsandnewinvestingisnotuncommonamongnew,highgrowthfirms.However,atthatstageinthegrowthpatternthefinancingisgenerallyfromequityandlonger-termdebt.Thesignificantuseofshort-termdebtwithcovenantsthatwillrestrictfurtherdebtissuesandotheractionsofthefirmsuggeststhattheequityandlong-termdebtmarketsarenotandwillnotbeopentothisclient.Unlessprofitabilityandpositivecashflowfromoperationsarearoundthecorner,thiscompanycouldhaveseriousproblemsraisingadditionalcapital.Thismaynotbeagoodinvestment.
5-28Itisalwayshardtoknowwhatisinamanager’smind.Microsoftexperiencedexplosivegrowth.Itisboughtcompaniesonaregularbasis,butitsavailablecashandliquidinvestmentscontinuedtogrow.Itdoesnotmakesensetocontinuetomanagelowyieldinginvestmentsingovernmentbondsandsuch.Microsoftchosetodistributethiscapitaltoinvestorsassharebuybacksandaverylargeone-timedividend,withacommitmenttocontinuepayingdividends.PriortoMicrosoft’sdecisiontopaydividends,manyanalystsfearedthatMicrosoftwouldchoosetomakeevenlargerandperhapsill-advisedpurchasesofothercompanies.
5-29Until2002Amazonhadnegativecashflowsfromoperations,anditusedcashforinvestingactivities.ThepositivecashflowfromoperationsindicatesthatAmazonismaturing.Infact,havingcashflowfromoperationsexceedinginvestmentneeds(thatis,positivefreecashflow)isasignthatAmazonisenteringastagewheregrowthmaybeslowingbutprofitabilityisincreasing.
5-30Thisattitudewouldpreventanyonefromeverinvestinginabrandnewcompanywithagreatidea.Sincethesecompaniesareoftenrisky,thisstrategymightbequiteappropriateforinvestorswhowereretiredandreliedoninvestmentsforlivingexpenses.However,forayoungerpersonwithmoreabilitytotakerisk,anappropriateexposuretoyoung,dynamicgrowthcompaniesmightbequiteappropriate.Thecharacteristicsreferredtointhequestionidentifythetargetinvestmentsasyounggrowthcompaniesforthemostpartbutdonotrevealmuchaboutotherinvestmentdecisionvariablessuchastheindustry,theageofthefirm,thenatureoftheproduct,andsoon.
5-31(10min.)
BREMERHAVNSHIPPINGCOMPANY
StatementofCashFlowsfromFinancingActivities
FortheYearEndedDecember31,20X8
Cashflowsfromfinancingactivities:
Proceedsfromissueoflong-termdebt€200,000
Paymenttoretirelong-termdebt(160,000)
Paymenttoretirecommonstock(35,000)
Dividendspaid(11,000)
Netcashusedforfinancingactivities€(6,000)
Noticeespeciallythatbothproceedsfromthenewissueandthepaymenttoretirelong-termdebtarelisted.Presentingonlythenetamount,€40ofproceeds,isnotpermitted.Also,theinterestisomittedbecauseitisanoperatingactivity,notafinancingactivity.
5-32(5-10min.)
FAR-EASTTRADINGCOMPANY
StatementofCashFlowsfromInvestingActivities
FortheYear20X5
Purchasesoffixedassets$(160,000)
Proceedsfromthesaleoffixedassets20,000
InvestmentinRepulskiCompany(60,000)
Netcashusedforinvestingactivities$(200,000)
5-33(5-10min.)
POULSBOBAYCOMPANY
ScheduleofNoncashInvestingandFinancingActivities
Notepayableissuedforacquisition
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