Q1:
Will the income statement include cash dividends declared and paid in the reporting period?
Yes or No?
Q2:
Explain the effect on Cash Received and Interest Expense Recognized when
A. Bonds are issued at Face Value
B. Bonds are issued at a discount
C. Bonds are issued at a premium
(Hint: your answer for each independent situation [A, B, and C] should include the phrases "Credit to Bonds Payable" and "Contract Interest Rate")
Q3:
Explain how the balance sheet and income statement of a company are affected in each of the following independent situations when the investment is accounted for using the equity method:
A. The company they invested in earns a profit for the year
B. The company they invested in has a net loss for the year
C. The company they invested in pays a cash dividend
Q4:
Explain the relationship between the balance sheet, the income statement, and the statement of cash flows using the indirect method. That is, how do you prepare a statement of cash flows using the indirect method? Don't use numbers but explain the mathematical calculations and line items.
Q5:
What do we learn by using the vertical analysis process for a company when analyzing the income statement and the balance sheet? That is, how would you explain to someone what you learn about a company by completing a vertical analysis of their SEC 10K income statement and balance sheet?
Q6 Preparing a statement of cash flows using the indirect method:
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Raco Incorporated's comparative balance sheets are presented below.
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Raco Incorporated
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Comparative Balance Sheets
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31-Dec
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2015
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2014
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Cash
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$25,210
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$10,820
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Accounts receivable
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14,200
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23,630
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Prepaid Insurance
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3,600
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2,400
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Land
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12,395
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15,410
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Buildings
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54,679
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42,400
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Accumulated depreciation-buildings
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(16,540)
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(12,790)
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Total
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$93,544
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$81,870
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Accounts payable
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$11,256
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$8,945
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Unearned revenue
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$5,400
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$18,000
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Common stock
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30,000
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20,000
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Retained earnings
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46,888
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34,925
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Total
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$93,544
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$81,870
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Additional information:
Net income was $56,893. Dividends declared and paid were $44,930.
All other changes in noncurrent account balances had a direct effect on cash flows, except the change in accumulated depreciation. The land was sold for $4,700.
Required: Prepare a statement of cash flows for the year ended December 31, 2015 using the indirect method. (Hint: for any accounts where the balance changed, create a T account or record other analysis for your review. You might make a column of changes, so you can see if a balance increased or decreased and by how much. You do not need to turn this in but you can.
You may wish to use Excel for this problem. The balance should copy and paste into Excel). If you use Excel you can submit a separate file for the statement of cash flow problem.