Chapter 3 Understanding Financial Statements and Cash Flows

23) A firm has after-tax cash flow from operations equal to $100,000. Operating working capital increased by $20,000, and the firm purchased $30,000 of fixed assets. The firm's free cash flow was

A) $50,000.

B) $90,000.

C) $110,000.

D) $150,000.

24) A firm paid dividends of $10,000, paid interest of $20,000, reduced debt principal outstanding (paid off debt) in the amount of $100,000, and sold new stock for $150,000. What was the firm's cash flow from financing activities?

A) +$20,000 ($20,000 flowed into the firm)

B) -$20,000 ($20,000 flowed out of the firm)

C) +$280,000 ($280,000 flowed into the firm)

D) -$280,000 ($280,000 flowed out of the firm)

25) Table 3-3

Marlett Company

Financial Information

	December 2009	December 2010
Net Income	$2,000	$4,000
Accounts receivable	750	1,250
Accumulated depreciation	1,000	1,400
Common stock	4,500	5500
Paid-in capital	7,500	8500
Retained earnings	1,500	3,500
Accounts payable	750	950

Based on the information in Table 3-3, prepare a statement of cash flows for 2010. Assume that there were no changes in any other asset or liability accounts, and that the ending cash balance for 2009 was $100.

Answer:

Marlett Company
Statement of Cash Flows
For the Year Ended Dec. 31, 2008
Operating Activities
Net Income	$4,000
Depreciation Expense	400
Increase in Accounts Receivable	(500)
Increase in Accounts Payable	200
Cash Flow from Operations	$4,100
Investing Activities
Cash Flow from Investing Activities	$0
Financing Activities
Increase in Common Stock	$1,000
Increase in Paid-in-Capital	1,000
Dividends Paid	(2,000)
Cash Flow from Financing Activities	$0
Change in Cash	$4,100
Beginning Cash Balance	100
Ending Cash Balance	$4,200

Diff: 2

Keywords: Cash Flow

AACSB: Analytic skills

26) Is it possible for a company that has negative net income and negative operating cash flow to end the year with an increase in cash and an increase in stock price? Explain your answer.

27) Mr. Wizard's Magic Shoppe had the following condensed balance sheet at the end of operation for 2010:

Mr. Wizard's Magic Shoppe

Balance Sheet

December 31, 2010

Cash	$40,000		Current Liabilities	$35,000
Other current assets	60,000		Long-term Notes Payable	40,000
Total current assets	$100,000		Bonds Payable	50,000
Investments	$25,000		Capital Stock	150,000
Fixed assets (net)	110,000		Retained earnings	80,000
Land	$120,000
Total assets	$355,000		Total Liabilities and Equity	$355,000

During 2011, the following occurred

a. Mr. Wizard's sold some of its investments for $13,000 which resulted in a gain of $300 after taxes. The gain (net of taxes) has been included in the company's 2011 net income.

b. Additional land for a plant expansion was purchased for $25,000.

c. Bonds payable were paid in the amount of $10,000.

d. An additional $35,000 in capital stock was issued.

e. Dividends of $15,000 were paid to stockholders.

f. Net income for 2011 was $48,000 after allowing for $15,000 in depreciation.

g. A second parcel of land was purchased through the issuance of $10,000 in bonds, and $5,000 in long-term notes payable.

Required:

a. Prepare a statement of cash flows for the year ended 12/31/2011. (check figure: ending cash balance = $72,500)

b. Prepare a condensed balance sheet for Mr. Wizard's at December 31, 2011.

28) Given the information below, calculate the company's cash balance at the end of the year.

Cash Balance at Beginning of Year	$80,000
Activity During the Year
Increase in Accounts Payable	$60,000
Decrease in Accounts Receivable	$40,000
Depreciation Expense	$500,000
Net Income	$2,000,000
Purchase of Fixed Assets	$800,000
Sales of Common Stock	$100,000
Decrease in Notes Payable	$85,000
Dividends Paid	$15,000

Learning Objective 4

1) Generally Accepted Accounting Principles (GAAP). GAAP is a set of principle-based accounting standards established by the Financial Accounting Standards Board (FASB).

2) International Financial Reporting Standards (IFRS) is a set of principle-based accounting standards that were established by the International Accounting Standards Board (IASB).

3) Which of the following statements about International Financial Reporting Standards (IFRS) is NOT true?

A) IFRS sets out broad and general principles that accountants should follow when preparing financial statements.

B) IFRS leaves LESS room for discretion than GAAP does.

C) IFRS offers simplicity but also possibly more leeway for accounting malpractice than does GAAP.

D) In 2008, the Securities and Exchange Commission (SEC) announced its plan to convert U.S. companies from GAAP to IFRS.

4) Which of the following statements about Generally Accepted Accounting Principles (GAAP) is NOT true?

A) GAAP is a set of rule-based accounting standards established by the Financial Accounting Standards Board (FASB).

B) GAAP sets out the standards, conventions, and rules that accountants must follow when preparing audited financial statements.

C) GAAP is complex, providing more than 150 "pronouncements" as to how to account for different types of transactions.

D) All of the statements above are true.

Learning Objective 5

1) Rogue Corp. has sales of $4,250,000; the firm's cost of goods sold is $2,500,000; and its total operating expenses are $600,000. The firm's interest expense is $250,000, and the corporate tax rate is 40%. What is Rogue's tax liability?

A) $258,000

B) $260,000

C) $360,000

D) $600,000

2) The income statement for Simpson, Inc. indicates that tax expense was $30,000. The balance sheet indicates that taxes payable for the same year increased by $5,000. What amount did Simpson, Inc. actually pay in taxes during this year?

A) $15,000

B) $20,000

C) $25,000

D) Cannot be determined without the cash balance

3) Prepare an income statement using the information given below. Make sure to identify gross profit, operating income, and net income.

Inventories	$50,000
Cost of Goods Sold	$250,000
Administrative Expenses	$50,000
Accumulated Depreciation	$150,000
Sales	$600,000
Depreciation Expense	$25,000
Selling Expenses	$150,000
Common Stock Dividends	$8,000
Interest Expense	$8,000
Corporate Tax Rate	40%

Learning Objective 6

1) It is possible for two companies to have the same financial performance, but their financial statements can be different, depending on how and when the managers choose to report certain transactions.

2) In the United States, financial statements are prepared following the Financial Accounting Standards Board's generally accepted accounting principles (GAAP).