$
1,715,000
300,000
70,000
2,085,000
31-Dec-11
$
900,000
120,000
50,000
1,070,000
1,100,000
900,000
-190,000
-70,000
910,000
830,000
2,995,000
1,900,000
Accrued interest
Accounts payable
Unearned revenue
Total current liabilities
3,000
280,000
30,000
313,000
2,000
100,000
4,000
106,000
Bank loan
Total liabilities
350,000
663,000
183,000
289,000
Common stock
Retained earnings
Stockholders equity
1,800,000
532,000
2,332,000
1,373,000
238,000
1,611,000
2,995,000
1,900,000
Cash
Accounts receivable
Inventory
Total current assets
Land and Equipment
Accumulated depreciation on
equipment
Total assets
Additional Information:
1. During the year, XYZ collected $616,000 from customers, made cash sales of $396,000, and credit sales for $
2. During the year, XYZ incurred cost of goods sold of $150,000, paid $34,000 in interest, and paid other admin
3. During the year, XYZ sold one of its equipment for a loss of $50,000, and purchased a new piece of land for $
Required:
1. Calculate the missing values in XYZs balance sheet.
2. Calculate net income for the year.
3. Prepare the cash flow statement for the year using the indirect method.
2. Calculate NI
Recognized Unearne
Sales
Less: COGS
24,000
770,000
150000
620,000
Gross Profit
Operating Expenses
Interest expense
Administrative expens
Depreciatio
Non-expense
Loss from sale of equ
NI
35,000 34,000+1,000
65,000
150,000
50,000
320,000
Change
815,000
180,000
20,000
1,015,000
616,000
350,000
-150,000
396,000
-616,000
-34,000
-65,000
200,000
-120,000
30,000
80,000
1,095,000
1,000
180,000
26,000
207,000
167,000
374,000
427,000
294,000
721,000
1,095,000
Interest Expense
320,000
ating activities:
50,000
150,000
-180,000
-20,000
1,000
180,000
26,000
527,000
120,000
-400,000
-280,000
167,000
427,000
-26,000
568,000
815,000
LTA
900,000
400,000
1,100,000
Accumulated Depreciation on Equipment
70,000
x
150,000
190,000
As a result, x = 30,000
sum
20,000
-400,000
533,000
-266,000
-150,000
0
0
0
30,000
Cash
900,000
616,000
396,000
34,000
65,000
400,000
1,413,000
pense
320,000
50000
150000
-180,000
-20,000
1,000
180,000
26,000
527,000
Cash
Loss
Acc. Dep.
Equipment
?
?=120,000
50,000
x=30,000
200,000
167,000
427,000
Accrued Interest
2000
3000
Accounts Receivable
120,000
350,000
616,000
-146,000
Cash
Accum. Depr.
Loss
50,000
Equipment
Sales
Accounts Receivable
120,000
350,000
170,000
300,000
U/R
4,000
50,000
x
30,000
x=
24,000
50000
Question Two:
The following table summarizes the balances of assets, liabilities, and equity accounts for ABC Company at the begi
Cash
Accounts receivable
Inventory
Prepaid insurance
Prepaid rent
Office Supplies
Equipment
Accumulated depreciation-equipment
Accounts payable
Salary payable
Unearned revenue
Common stock
Retained Earnings
Beginning of 2013
?
2,300
12,150
3,250
6,800
4,200
8,000
?
4,500
2,000
6,200
19,500
8,300
The following table summarizes the flows during the period for ABC Company:
Dividends
Sales revenue earned
Cost of goods Sold
Salary expense
Depreciation expense-equipment
Rent expense
Insurance expense
Office Supplies expense
Advertising expense
3,000
?
21,600
4,900
3,800
4,800
1,200
500
700
Required:
1. Calculate Net Income.
2. Prepare the cash flow statement using the direct method.
3. Prepare the cash flow statement using the indirect method.
1. NI
Beg. RE
Add: NI
Less: Dividends
Eng. RE
2. Cash Flow statement (direct method)
Cash Flows from Operating Activities
8,300
10,600
3,000
15,900
, and equity accounts for ABC Company at the beginning and the end of 2013:
Assets
End of 2013
Change
Liabilities
19,400
#VALUE!
Equity
2,500
200
12,000
3,400
6,500
3,700
12,500
10,200
5,400
1,400
6,500
20,600
15,900
-150
150
-300
-500
4,500
#VALUE!
900
-600
300
1,100
7,600
Sales
COGS
Gross Profit:
48,100
21,600
26,500
Salary Expen
Depreciation
Rent Expense
Insurance Ex
Office Suppli
Advertising E
NI
4,900
3,800
4,800
1,200
500
700
10,600
48,200
20,550
5,500
1,350
4,500
700
15,600
4,500
-4,500
1,100
3,000
-1,900
9,200
10,200
19,400
Net income
Adjustments to reconcile net income to cash gen
Depreciation expense
Changes in operating assets and liabilities:
Accounts Receivable
Inventories
Prepaid Insurance
Prepaid rent
Office Supplies
Accounts Payable
Salary payable
Unearned revenue
Cash generated by operating activities
Cash Flows from Investing Activities
Payments for acquisition of equipment
Cash used in investing activities
Cash Flows from Financing Activities
Proceeds from issuance of common stock
Dividends Paid
Cash used in Financing activities
Increase in cash and cash equivalents
Cash and cash equivalents, beginning of year
Cash and cash equivalents, end of the year
49,800
13,300
36,500
10,600
cile net income to cash generated by operating activities:
3,800
assets and liabilities:
200
-150
by operating activities
vesting Activities
tion of equipment
ing activities
nancing Activities
ce of common stock
cing activities
cash equivalents
alents, beginning of year
150
-300
-500
900
-600
300
15,600
4,500
-4,500
1,100
3,000
-1,900
P. 2-42
Sales
Macy's
Home Depot, I
Stapes, Inc.
Target Corp.
Wal-Mart Stor
a. NI/Sales
NI(Loss)
27,686
74,754
24,381
73,301
469,162
Operating
Investing
1,335
2,261
-863
4,535
6,975
-1,432
-211
1,219
-342
2,999
5,325
-2,855
16,999
25,591
-12,611
Ratio
Macy's
Home Depot, I
Stapes, Inc.
Target Corp.
Wal-Mart Stor
Operational efficiency
b. Net cash flows from operating/Sales
Ratio
Macy's
Home Depot, I
Stapes, Inc.
Target Corp.
Wal-Mart Stor
Yes, it coincides with the reuslt of a.
Rank
5%
6%
-1%
4%
4%
2
1
5
3
4
Rank
8%
9%
5%
7%
5%
2
1
5
3
4
d. It means that company is paying more for paying down debt, interest on debt, and dividen
Financing
-2,389
-5,034
-812
-2,488
-11,972
t on debt, and dividends to shareholders than receiving cash from issuing stock and bonds.
and bonds.
d. Wal-Mart could have reivested its earnings back into company. However, Wal-Mart is alread
e. It is good for a company to have a positive net increase in cash so that they can satisfy de
tion is added back to net income because it is non-cash expense item that decreased net income befo
it and net income increased, but cash is not yet received. As a result, the increase in receivables shou
not reflected in cost of goods sold yet. Therefore, deduct increase in inventories.
use goods and services are acquired on credit, delyaing cash payment.
tion expense?
e increase
ever, Wal-Mart is already a mature company, and investores might want a steady income.
income.
a.
Balance Sheet
Cash
Asset
1
Noncash
Assets
155,000
(10,000)
(80,000.00)
60,000.00
(10,000.00)
50,000.00
Earned
Capital
Revenues
Expenses
100,000.00
40,000.00
80,000.00
40,000.00
100,000.00
(70,000.00)
30,000.00
10,000.00
(7,500.00)
(17,000.00)
Liabilities
55,000.00
(70,000.00)
Income Statement
Contrib.
Capital
(7,500.00)
(7,500.00)
(17,000.00)
(17,000.00)
1,000.00
(2,000.00)
(1,000.00)
(1,000.00)
(2,000.00)
(2,000.00)
b.
Statement
Income Statement
Net
Income
Balance Sheet
Sales
Less: COGS
100,000.00
(70,000.00)
Gross Profit
30,000.00
Operating Expenses
Advertisement Expense
Current Assets
Inventory
98,000.00
10,000.00
Accounts Receivable
40,000.00
(7,500.00)
2,500.00
Equipment
50,000.00
(2,000.00)
170,000.00
Salaray expense
(17,000.00)
Salaray Expense
(1,000.00)
Total assets
198,500.00
Depreciation Expense
(2,000.00)
Note Payable
95,000.00
(7,500.00)
Net Income
2,500.00
Wages Payable
1,000.00
Total Liabilities
96,000.00
(17,000.00)
(1,000.00)
Common Stock
100,000.00
(2,000.00)
Retained Earnings
2,500.00
198,500.00
p. 2-44
A. Why does Verizon add back depreciation to compute net cash flows from operating activiti
The depreciation expense was deducted in computing net income. The depreciaiton expense
Comparing employee retirement benefits, which indirectly represents labor cost, and depreci
b. The more they spend on capital expenditures, the higher the depreciation expense will be.
c. the high debt load means that Verizon's liquidity is low, which means that the risk of Verizo
d. Debt payments are obligatory, while dividends payments are not. Verizon is a mature com
e. Overall assessment.
Net income - profitability
Cash flow - liquidity
capital expenditures (more on this later). It's generally assumed that this use of cash is a prim
It shows how the company is able to pay for its operations and future growth.
You want to see a company re-invest capital in its business by at least the rate ofdepreciatio
Free cash flow signals a company's ability to pay debt, pay dividends, buy back stock and fac
Free cash flow, which is essentially the excess cash produced by the company, can be return
s that the risk of Verizon not being able to meet their financial obligations increase. It makes Verizon sp
rizon is a mature company, so they don't need to reinvest the earnings as much as a new company. Al
his use of cash is a prime necessity for ensuring the proper maintenance of, and additions to, a compan
the rate ofdepreciationexpenses each year. If it doesn't re-invest, it might show artificially high cash i
se. It makes Verizon spend more in satisfying the debt obligations instead of spending in capital expend
as a new company. Also investors might want a steady income.
additions to, a company'sphysical assetsto support its efficient operation and competitiveness.
artificially high cash inflows in the current year which may not be sustainable.
s without hurting the existing operations. The most common method of calculating free cash flow is:
ompetitiveness.