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All essay questions require full, grammatically correct sentences which include your reasoning and/or explanation. Write your answers in a separate Word file. Do NOTwrite them

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All essay questions require full, grammatically correct sentences which include your reasoning and/or explanation. Write your answers in a separate Word file. Do NOTwrite them in an Excel worksheet. Below is the corresponding Excel file that you will need in order to answer the following Essay Questions: ?China IV - Excel Document (86 KB) 1.The rule-of-thumb in evaluating the cash flows of an organization is: ?The cash flows from operations should be positive, and increasing each year, and ideally should be sufficient to cover any negative cash flows from investing activities. ?How would you evaluate China Trade in terms of cash flows, in light of this rule-of-thumb measure? 2.China Trade's income statement (after adjusting for depreciation expense and adjusting entries) shows net income of $300. Yet, its cash flows from operations were a negative $3,000. What caused a $300 accrual basis profit to become a $3,000 "loss" in terms of cash flows from operations? Hint: See the Compare worksheet.

image text in transcribed A continuing case study... CHINA TRADE, INC. Part IV - Statement of Cash Flows Learning Objectives l l l l ` To understand what information the Statement of Cash Flows provides To classify cash transactions in the appropriate Operating, Investing or Financing activity categories, and thereby prepare a Statement of Cash Flows under the "direct method". To prepare the Cash Flows from Operating Activities section under the "indirect method", using increases and increases in balance sheet amounts. To evaluate an organization's cash flows, using a rule-of-thumb measure. Requirements a. For each of the cash transactions under the "Transactions", tab, enter the cash amount in the Inflows or Outflows column of the Cash Flows Journal as appropriate (see "CashFlows" tab). Select the appropriate "classification code" from the code numbers on the Statement of Cash Flows. The first transaction has already been entered to serve as an example. If a transaction does not involve cash, leave that line blank. For answers to all the adjusting entries, click on the "Answer" tab. b. Note that the Statement of Cash Flows is prepared from your postings automatically. When you have completed all the cash postings, check the end-of-period balance to make sure it agrees with the Cash amount on the balance sheet at August 31 (see "Balance Sheet" tab.) c. In the tab called "Indirect" is a skeleton for the Operating Activities section of the Statement of Cash Flows as it would appear under the "indirect method." Fill in the amounts on the blank lines by referring to the income statement and balance sheet contained in the "Income & Retained Earnings" and "Balance Sheet" tabs. Note that increases in asset accounts become negative adjustments and are to be shown in brackets and subtracted from net income rather added. The opposite is true of liabilities. Note also that since all balance sheet accounts started with a zero balance at the beginning of this first month of operations, the amount of increase of each account is the same as the ending balance. Normally, it would be necessary to subtract the beginning balance from the ending balance to arrive at the amount of increase or decrease for the period. When finished check your answer to the one contained in the "Answer" tab. d. Check to make sure the net cash flows from operating activities under the "indirect method" is the same as the net cash flows from operating activities under the "direct method". e. Essay Questions Go to the tab called "Essays" and write your answers in a separate Word document. Do NOT write them in the Excel workbook. All essay questions require full, grammatically correct sentences which include your reasoning and/or explanation. It is strongly suggested that you start each answer with the wording of the question; for example "Overhead costs cannot be charged directly to individual jobs because..." Transactions For hints, move mouse over red triangle... -1- Aug 1 The corporation opened a bank account with a deposit totaling $10,000, consisting of a $5,000 investment by you, and a $5,000 investment by your brother-in-law, James Madison. In return, the corporation issued 500 shares of common stock to you and an equal number to Madison. This first transaction has already been entered to serve as an example. ` Paid $1,000 for one month's rent of office space. 2 Aug 1 3 Aug 1 Purchased a $15,000 delivery van for $4,000 in cash, the remainder by a secured loan in the form of a note bearing 12% interest, payable in 48 equal monthly installments. 4 Aug 6 Purchased on credit and received delivery of $12,000 in merchandise from Shanghai Export Co. 5 Aug 17 Sold merchandise costing $3,000 to The Gift Gallery for $5,000 in cash. 6 Aug 18 Billed (sold on credit) Vanity Faire $8,000 for merchandise costing $4,000. 7 Aug 29 Wrote checks in payment of the following expenses: Wages for part-time delivery person $ 600 Advertising in newspaper 1,300 Telephone service 1,100 8 Aug 30 Received $2,000 on account from the client billed on the 18th. 9 Aug 31 The Board of Directors declared a $1,000 dividend payable to James Madison, and a check was drawn the same day. 10 Aug 31 Paid $6,000 \"on account\" to Shanghai Trading Co. (See purchase of merchandise on credit, August 6.) Cash Transaction Code 1 2 3 4 5 6 7 8 9 10 31 Inflow Cash from issuing 10,000 Outflow Statement of Cash Flows (Direct Method) For the Month Ended August 31, 2001 Cash Flows from Operating Activities 11 Cash received from customers 12 Cash paid to suppliers, employees Net cash flows from operating activities - Cash Flows from Investing Activities 21 Purchase of Equipment 22 Proceeds on Sale of Equipment Net cash flows from investing activities - - - Cash Flows from Financing Activities 10,000 31 Cash from issuing stock 32 Cash from borrowing 33 Payments on loans 34 Dividends paid to shareholders Net cash flows from financing activities 10,000 Net increase (decrease) in cash 10,000 Cash and equivalents at beginning 8/1/2001 Cash and equivalents at end of period 8/31/2001 $ 10,000 The following schedule reflects the "Operating Activities" section of the Statement of Cash Flows using the Indirect Method rather than the Direct Method. (The Investing Activities and Financing Activities sections have the same format under both the direct and indirect methods. Only the Operating Activities section is different.) See Requirement "C" under the Instructions tab. Statement of Cash Flows (Indirect Method) Operating Activities Section, only For the Month Ended August 31, 2001 This version of China IV has the Indirect Method figures already filled in. Cash Flows from Operating Activities: Net Income, per Income Statement $ 300 Adjustments to reconcile Net Income to Net Cash Flows from Operating Activities: Add back: depreciation expense 250 Subtract increases, or add back decreases in current assets: Increase in accounts receivable Increase in inventory Increase in prepaid expenses (5,650) (4,500) (300) Add back increases, or subtract decreases in current liabilities: Increase in accounts payable Increase in wages payable Increase in income tax payable 6,600 200 100 Net cash flows from operating activities $ (3,000) ACCRUAL BASIS PROFIT VS. CASH FLOWS FROM OPERATIONS Income Statement (accrual basis) Revenue from sales / Cash paid by customers Deductions from income: Cost of goods sold (reduction of inventory) Cash paid during the period for inventory Advertising expense Depreciation expense Rent expense (all paid in cash) Telephone Wages Income taxes Net income vs. Cash flows from operations $ 12,650 Statement of Cash flows (cash basis) 7,000 7,500 1,000 250 1,000 1,700 800 100 12,350 6,000 1,300 0 1,000 1,100 600 0 10,000 300 (3,000) Essay Questions All essay questions require full, grammatically correct sentences which include your reasoning and/or explanation. Write your answers in a separate Word file. Do NOT write them in an Excel worksheet. 1. The rule-of-thumb in evaluating the cash flows of an organization is: The cash flows from operations should be positive, and increasing each year, and ideally should be sufficient to cover any negative cash flows from investing activities. How would you evaluate China Trade in terms of cash flows, in light of this rule-of-thumb measure? 2. China Trade's income statement (after adjusting for depreciation expense and other adjusting entries) shows net profit of $300. Yet, its cash flows from operations were a negative $3,000. What caused a $300 accrual basis profit to become a $3,000 "loss" in terms of cash flows from operatations? Hint: See the Compare worksheet.. See the answer to the "indirect method" immediately below the "Statement of Cash Flows" Cash Transaction Code 1 2 3 4 5 6 7 8 9 10 Inflow 31 12 21 Cash from issuing stock Cash paid to suppliers, em Purchase of Equipment Cash received from custom 5,000 12 11 34 12 Cash paid to suppliers, em Cash received from custom Dividends paid to sharehold Cash paid to suppliers, em Outflow 10,000 11 Statement of Cash Flows For the Month Ended August 31, 2001 Cash Flows from Operating Activities 7,000 11 Cash received from customers (10,000) 12 Cash paid to suppliers, employees Net cash flows from operating activities 3,000 2,000 1,000 6,000 ## (3,000) Cash Flows from Investing Activities (4,000) 21 Purchase of Equipment 22 Proceeds on Sale of Equipment Net cash flows from investing activities 1,000 4,000 (4,000) Cash Flows from Financing Activities 10,000 31 Cash from issuing stock 32 Cash from borrowing 33 Payments on loans (1,000) 34 Dividends paid to shareholders Net cash flows from financing activities 9,000 $ Net increase (decrease) in cash Cash and equivalents at beginning 8/31/2001 - 8/1/2001 Cash and equivalents at end of period 2,000 $ 2,000 Statement of Cash Flows (Indirect Method) Operating Activities Section, only For the Month Ended August 31, 2001 Cash Flows from Operating Activities: Net Income, per Income Statement 300 Adjustments to reconcile Net Income to Net Cash Flows from Operating Activities: Add back: Depreciation expense 250 Subtract increases, or add back decreases in current assets: Increase in accounts receivable Increase in inventory Increase in prepaid expenses (5,650) ### (4,500) (300) Add back increases, or subtract decreases in current liabilities: Increase in accounts payable Increase in wages payable Increase in income tax payable 6,600 200 100 Net cash flows from operating activities (3,000) China Trade, Inc. Income Statement For the Month Ended August 31, 2001 Sales Cost of Goods Sold Gross Margin $ ` Operating Expenses Advertising Depreciation Expense Rent Telephone Wages Total Operating Expenses China Trade, Inc. Statement of Retained Earnings For the Month Ended August 31, 2001 12,650 7,500 5,150 1,000 250 1,000 1,700 800 4,750 Net income before tax 400 Less: Income tax expense 100 Net Income (Loss) $ 300 Retained earnings at August 1, 2001 $ Net income (loss) Less: Dividends Retained earnings at August 31, 2001 0 300 (1,000) $ (700) China Trade, Inc. Balance Sheet August 31, 2001 ASSETS Current Assets: Cash Accounts Receivable Inventory Prepaid Advertising LIABILITIES and OWNER'S EQUITY ` 6,600 200 100 Long-Term Liabilities: Long-term Note Payable Property and Equipment: Delivery Van Accumulated Deprec. Total Assets 2,000 5,650 4,500 300 Current Liabilities: Accounts Payable Wages Payable Income Tax Payable 15,000 (250) $ 27,200 11,000 Owner's Equity: Common Stock Retained Earnings 10,000 (700) Total Liabilities and Equity $ 27,200 Balance Sheet Date: August 31, 2001 Income Statement For the Month Ended August 31, 2001

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