23 Statement of Cash Flows CONCEPTS FOR ANALYSIS 23
CONCEPTS FOR ANALYSIS
CA23-1 WRITING (Analysis of Improper SCF) The following statement was prepared by Maloney Corporation’s accountant…
Instructions
(a) In general, what are the objectives of a statement of the type shown above for Maloney Corporation? Explain.
(b) Identify the weaknesses in the form and format of Maloney Corporation’s statement of cash flows without reference to the additional information. (Assume adoption of the indirect method.)
(c) For each of the six items of additional information for the statement of cash flows, indicate the preferable treatment and explain why the suggested treatment is preferable.
(AICPA adapted)
CA23-2 GROUPWORK (SCF Theory and Analysis of Improper SCF) Teresa Ramirez and Lenny Traylor are examining the following statement of cash flows for Pacific Clothing Store’s first year of operations.
Teresa claims that Pacific’s statement of cash flows is an excellent portrayal of a superb first year, with cash increasing $109,000. Lenny replies that it was not a superb first year—that the year was an operating failure, the statement was incorrectly presented, and $109,000 is not the actual increase in cash.
Instructions
(a) With whom do you agree, Teresa or Lenny? Explain your position.
(b) Using the data provided, prepare a statement of cash flows in proper indirect method form. The only noncash items in income are depreciation and the gain from the sale of the investment (purchase and sale are related).
CA23-3 (SCF Theory and Analysis of Transactions) Ashley Company is a young and growing producer of electronic measuring instruments and technical equipment. You have been retained by Ashley to advise it in the preparation of a statement of cash flows using the indirect method. For the fiscal year ended October 31, 2017, you have obtained the following information concerning certain events and transactions of Ashley.
1. The amount of reported earnings for the fiscal year was $700,000, which included a deduction for a loss of $110,000 (see item 5 below).
2. Depreciation expense of $315,000 was included in the income statement.
3. Uncollectible accounts receivable of $40,000 were written off against the allowance for doubtful accounts. Also, $51,000 of bad debt expense was included in determining income for the fiscal year, and the same amount was added to the allowance for doubtful accounts.
4. A gain of $6,000 was realized on the sale of a machine. It originally cost $75,000, of which $30,000 was undepreciated on the date of sale.
5. On April 1, 2017, lightning caused an uninsured building loss of $110,000 ($180,000 loss, less reduction in income taxes of $70,000). This loss was included in determining income as indicated in item 1 above.
6. On July 3, 2017, building and land were purchased for $700,000. Ashley gave in payment $75,000 cash, $200,000 market price of its unissued common stock, and signed a $425,000 mortgage note payable.
7. On August 3, 2017, $800,000 face value of Ashley’s 10% convertible debentures was converted into $150,000 par value of its common stock. The bonds were originally issued at face value.
Instructions
Explain whether each of the seven numbered items above is a cash inflow or outflow, and explain how it should be disclosed in Ashley’s statement of cash flows for the fiscal year ended October 31, 2017. If any item is neither an inflow nor an outflow of cash, explain why it is not, and indicate the disclosure, if any, that should be made of the item in Ashley’s statement of cash flows for the fiscal year ended October 31, 2017.
CA23-4 GROUPWORK (Analysis of Transactions’ Effect on SCF) Each of the following items must be considered in preparing a statement of cash flows for Cruz Fashions Inc. for the year ended December 31, 2017.
1. Fixed assets that had cost $20,000 6½ years before and were being depreciated on a 10-year basis, with no estimated scrap value, were sold for $4,750.
2. During the year, goodwill of $15,000 was considered impaired and was completely written off to expense.
3. During the year, 500 shares of common stock with a stated value of $25 a share were issued for $32 a share.
4. The company sustained a net loss for the year of $2,100. Depreciation amounted to $2,000 and patent amortization was $400.
5. Uncollectible accounts receivable in the amount of $2,000 were written off against Allowance for Doubtful Accounts.
6. Investments (available-for-sale) that cost $12,000 when purchased 4 years earlier were sold for $10,600.
7. Bonds payable with a par value of $24,000 on which there was an unamortized bond premium of $2,000 were redeemed at 101.
Instructions
For each item, state where it is to be shown in the statement and then how you would present the necessary information, including the amount. Consider each item to be independent of the others. Assume that correct entries were made for all transactions as they took place.
CA23-5 (Purpose and Elements of SCF) GAAP requires the statement of cash flows be presented when financial statements are prepared.
Instructions
(a) Explain the purposes of the statement of cash flows.
(b) List and describe the three categories of activities that must be reported in the statement of cash flows.
(c) Identify and describe the two methods that are allowed for reporting cash flows from operations.
(d) Describe the financial statement presentation of noncash investing and financing transactions. Include in your description an example of a noncash investing and financing transaction.
CA23-6 ETHICS (Cash Flow Reporting) Brockman Guitar Company is in the business of manufacturing top-quality, steelstring folk guitars. In recent years, the company has experienced working capital problems resulting from the procurement of factory equipment, the unanticipated buildup of receivables and inventories, and the payoff of a balloon mortgage on a new manufacturing facility. The founder and president of the company, Barbara Brockman, has attempted to raise cash from various financial institutions, but to no avail because of the company’s poor performance in recent years. In particular, the company’s lead bank, First Financial, is especially concerned about Brockman’s inability to maintain a positive cash position. The commercial loan officer from First Financial told Barbara, “I can’t even consider your request for capital financing unless I see that your company is able to generate positive cash flows from operations.”
Thinking about the banker’s comment, Barbara came up with what she believes is a good plan: With a more attractive statement of cash flows, the bank might be willing to provide long-term financing. To “window dress” cash flows, the company can sell its accounts receivables to factors and liquidate its raw materials inventories. These rather costly transactions would generate lots of cash. As the chief accountant for Brockman Guitar, it is your job to tell Barbara what you think of her plan.
Instructions
Answer the following questions.
(a) What are the ethical issues related to Barbara Brockman’s idea?
(b) What would you tell Barbara Brockman?
