I only need the two exercises in part 1 answered (it will say exercises), and the two demonstration problems for part 2. I need an explanation for the demonstration problems.
Part -1: Questions
-What are the purposes of the statement of cash flows?
-What are some of the uses of the statement of cash flows?
-What information is contained in the statement of cash flows?
-Which activities are generally included in operating activities?
-Which activities are included in investing activities?
-Which activities are included in financing activities?
-Where should significant investing and financing activities that do notinvolve cash flows be reported?
- Explain the difference between the direct and indirect methods forcomputing cash flows from operating activities.
-What are noncash expenses? How are they treated in computing cashflows from operating activities?
- Describe the treatment of a gain on the sale of equipment in preparing astatement of cash flows under the indirect method.
Exercise A
Indicate how the following data should be reported in a statement ofcash flows. A company paid USD 500,000 cash for land. A building was acquired forUSD 2,500,000 by assuming a mortgage on the building.
Exercise B
Cost of goods sold in the income statement for the year ended 2010was USD 260,000. The balances in Merchandise Inventory and Accounts Payablewere:
2010 January 1 2010 December31
Merchandise inventory $160,000 $180,000
Accounts payable 44,000 36,000
Calculate the amount of cash paid for merchandise for 2010.
Part -2: Questions
- What are the major sources of financial information for publicly ownedcorporations?
- The higher the accounts receivable turnover rate, the better off thecompany is. Do you agree? Why?
- Can you think of a situation where the current ratio is very misleadingas an indicator of short-term, debt-paying ability? Does the acid-testratio offer a remedy to the situation you have described? Describe asituation where the acid-test ratio does not suffice either.
- Before the Marvin Company issued USD 20,000 of long-term notes(due more than a year from the date of issue) in exchange for a likeamount of accounts payable, its current ratio was 2:1 and its acid-testratio was 1:1. Will this transaction increase, decrease, or have no effecton the current ratio and acid-test ratio? What would be the effect on theequity ratio?
- Through the use of turnover rates, explain why a firm might seek toincrease the volume of its sales even though such an increase can besecured only at reduced prices.
- Indicate which of the relationships illustrated in the chapter would bebest to judge:
a. The short-term debt-paying ability of the firm.
b. The overall efficiency of the firm without regard to the sources ofassets.
c. The return to owners (stockholders) of a corporation.
d. The safety of long-term creditors' interest.
e. The safety of preferred stockholders' dividends.
- Indicate how each of the following ratios or measures is calculated:
a. Payout ratio.
b. Earnings per share of common stock.
c. Price-earnings ratio.
d. Earnings yield on common stock.
e. Dividend yield on preferred stock.
f. Times interest earned.
g. Times preferred dividends earned.
h. Return on average common stockholders' equity.
i. Cash flow margin.
-How is the rate of return on operating assets determined? Is it possiblefor two companies with operating margins of 5 percent and 1 percent,respectively, to both have a rate of return of 20 percent on operatingassets? How?
- Cite some of the possible deficiencies in accounting information,especially regarding its use in analyzing a particular company over a 10-year period.
- Real world question From the Consolidated Statements of Incomeof The Limited in the Annual report appendix, determine thepercentage change in operating income from 2002 to 2003.
Demonstration Problem
Problem A
Comparative financial statements of Kellogg Company for 2003 and 2002 follow:
Wong Company
Comparative income statements Foe the years ended
2003 December 31, and 2002 (USD millions)
|
|
2003
|
2002
|
|
Net revenues
|
$6,954.7
|
$6,984.2
|
|
Cost of goods sold
|
3,327.0
|
3,325.1
|
|
Gross margin
|
$3,627.7
|
$3,659.1
|
|
Operating expense
|
2,551A
|
2,585.7
|
|
Ncnoperating expense (merest)
|
137.5
|
118.8
|
|
Income before income taxes
|
$938.8
|
$ 954.6
|
|
Income taxes
|
280.0
|
198.4
|
|
Net earnings
|
$ 658.8
|
$ 756.2
|
Kelm Company
Comparative Balance sheets
2003 December 31, and 2002 (USD millions)
|
|
2003
|
2002
|
| Assets |
|
|
|
Cash and temporary irreestmems
|
$204.4
|
$ 150.6
|
|
Accouvs receivable, net
|
685.3
|
678.5
|
|
Imentories
|
443.8
|
503.8
|
|
Other current asses
|
273.3
|
236.3
|
|
Property, net
|
2,526.9
|
2,640.9
|
|
Other assets
|
762.6
|
589.6
|
|
Total asses
|
$4,896.3
|
$4,808.7
|
|
Liabilities and stockholders' equity
|
|
|
|
Current labitties
|
$2,492.6
|
$1,587.8
|
|
Lang-term 'abates
|
1,506.2
|
2,407.7
|
|
C.omrnon stock
|
103.8
|
103.8
|
|
Capital in excess of par value
|
102.0
|
104.5
|
|
Retained earnings
|
1,501.0
|
1,317.2
|
|
Treasury stock
|
(374.0)
|
(380.9)
|
|
Currency translation schustnent
|
(435.3)
|
(331.4)
|
|
Total Liabilities and stockholders' equity
|
$4,896.3
|
$4,808.7
|
a. Prepare comparative common-size income statements for 2003 and 2002.
b. Perform a horizontal analysis of the comparative balance sheets.
Problem B
The balance sheet and supplementary data fa Xerox Corporation follow:
Xerox corporation
Balance sheet with IDES on an equity basis
2003 December 31 (USD millions)
| Assets |
2003
|
|
Cash
|
$ 1,741
|
|
Accounts receivable, net
|
2,281
|
|
finance receivables, net
|
5,097
|
|
Inventories
|
1,932
|
|
Deferred taxes and other current assets
|
1,971
|
|
Total current assets
|
S 13,022
|
|
Finance receivables due after one year net
|
7,957
|
|
land, buildings, and equipment, net
|
2,495
|
|
Investments in affilates, at equity
|
1,362
|
|
Goodwill
|
1,578
|
|
Other assets
|
3,061
|
|
Total assets
|
$ 29,475
|
| Liabilities and stockholders' equity |
|
|
Short-temi debt and current portion of long-semi debt
|
$ 2.693
|
|
Accounts payable
|
1,033
|
|
Accrued compensation and benefit costs
|
662
|
|
Unearned income
|
250
|
|
Other current liabilities
|
1,630
|
|
Teal current lablties
|
$ 6,268
|
|
Long-term debt
|
15.404
|
|
Likehies for post-retirement medical benefits
|
1,197
|
|
Deferred taxes and other liabilities
|
1,876
|
Discontinued poicyholders' deposits and other operatons liabilities
|
670 |
|
Deferred ESOP benefis
|
(221)
|
|
Minorities ern:erns in equity of subsidiaries
|
141
|
|
Preferred stock
|
647
|
|
Common shareholders' equity (108.1 moron)
|
3,493
|
|
Total 'abilities and shareholders' equity
|
$ 29,475
|
• Cost of goods sold, USD 6,197.
• Net sales, USD 18,7o1.
• Inventory, January 1, USD 2,29o.
• Net interest expense, USD 1,031.
• Net income before interest and taxes, USD 647.
• Net accounts receivable on January 1, USD 2,633.
• Total assets on January 1, USD 28,531.
Compute the following ratios:
a. Current ratio.
b. Acid-test ratio.
c. Accounts receivable turnover.
d. Inventory turnover.
e. Total assets turnover.
f. Equity ratio.
g. Times interest earned ratio.