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Reporting and Analyzing Cash Flows Problem 1 - Statement of cash flows (direct method) Umlauf's comparative balance sheets, income statement, and additional information follow. 1 Additional Information 1. Equipment costing $21,375 with accumulated depreciation of $11,100 is sold for cash. 2. Equipment purchases are for cash. 3. Accumulated Depreciation is affected by depreciation expense and the sale of equipment. 4. The balance of Retained Earnings is affected by dividend declarations and net income. 5. All sales are made on credit. 6. All merchandise inventory purchases are on credit. 7. Accounts Payable balances result from merchandise inventory purchases. 8. Prepaid expenses relate to \"other operating expenses.\" Required Prepare a statement of cash flows using the direct method for year 2011. HINT: PLANNING THE SOLUTION Prepare a blank statements of cash flows with sections for operating, investing, and financing activities using the direct method format. Compute the cash paid for equipment and the cash received from the sale of equipment using the additional information provided along with the amount for depreciation expense and the change in the balances of equipment and accumulated depreciation. Use Taccounts to help chart the effects of the sale and purchase of equipment on the balances of the Equipment account and the Accumulated Depreciation account. Compute the effect of net income on the change in the Retained Earnings account balance. Assign the difference between the change in retained earnings and the amount of net income to dividends declared. Adjust the dividends declared amount for the change in the Dividends Payable balance. Compute cash received from customers, cash paid for merchandise, cash paid for other operating expenses, and cash paid for taxes as discussed in class. Enter the cash effects of reconstruction entries to the appropriate section(s) of the statement. Total each section of the statement, determine the total net change in cash, and add it to the beginning balance to get the ending balance of cash. 2 Problem 2 - Statement of cash flows (indirect method) Kazaam Company, a merchandiser, recently completed its calendar-year 2011 operations. For the year, (1) all sales are credit sales, (2) all credits to Accounts Receivable reflect cash receipts from customers, (3) all purchases of inventory are on credit, (4) all debits to Accounts Payable reflect cash payments for inventory, and (5) Other Expenses are paid in advance and are initially debited to Prepaid Expenses. The company's balance sheets and income statement follow. 3 Additional Information on Year 2011 Transactions 1. The loss on the cash sale of equipment was $5,125 (details in 2). 2. Sold equipment costing $46,875, with accumulated depreciation of $28,125, for $13,625 cash. 3. Purchased equipment costing $96,375 by paying $25,000 cash and signing a long-term note payable for the balance. 4. Borrowed $3,750 cash by signing a short-term note payable. 5. Paid $31,375 cash to reduce the long-term notes payable. 6. Issued 2,500 shares of common stock for $18 cash per share. 7. Declared and paid cash dividends of $62,125. Required Prepare a complete statement of cash flows; report its operating activities using the indirect method. Disclose any noncash investing and financing activities in a note. 4 Preparation of Master Budget Problem 3 - Merchandising: Preparation and analysis of cash budgets with supporting inventory and purchases budgets Connick Company sells its product for $22 per unit. Its actual and projected sales follow. All sales are on credit. Recent experience shows that 40% of credit sales is collected in the month of the sale, 35% in the month after the sale, 23% in the second month after the sale, and 2% proves to be uncollectible. The product's purchase price is $12 per unit. All purchases are payable within 21 days. Thus, 30% of purchases made in a month is paid in that month and the other 70% is paid in the next month. The company has a policy to maintain an ending monthly inventory of 20% of the next month's unit sales plus a safety stock of 100 units. The January 31 and February 28 actual inventory levels are consistent with this policy. Selling and administrative expenses for the year are $1,920,000 and are paid evenly throughout the year in cash. The company's minimum cash balance for month-end is $50,000. This minimum is maintained, if necessary, by borrowing cash from the bank. If the balance exceeds $50,000, the company repays as much of the loan as it can without going below the minimum. This type of loan carries an annual 12% interest rate. At February 28, the loan balance is $12,000, and the company's cash balance is $50,000. Required 1. Prepare a table that shows the computation of cash collections of its credit sales (accounts receivable) in each of the months of March and April. 2. Prepare a table showing the computations of budgeted ending inventories (units) for January, February, March, and April. 3. Prepare the merchandise purchases budget for February, March, and April. Report calculations in units and then show the dollar amount of purchases for each month. 4. Prepare a table showing the computation of cash payments on product purchases for March and April. 5. Prepare a cash budget for March and April, including any loan activity and interest expense. Compute the loan balance at the end of each month. 6. Refer to your answer to part 5. Connick's cash budget indicates whether the company must borrow additional funds at the end of March. Suggest some reasons that knowing the loan needs in advance would be helpful to management 5 Problem no. 4 - Master Budgets Wild Wood Company's management asks you to prepare its master budget using the following information. The budget is to cover the months of April, May, and June of 2013. Additional Information 1. Sales for March total 10,000 units. Each month's sales are expected to exceed the prior month's results by 5%. The product's selling price is $25 per unit. 2. Company policy calls for a given month's ending inventory to equal 80% of the next month's expected unit sales. The March 31 inventory is 8,400 units, which complies with the policy. The purchase price is $15 per unit. 3. Sales representatives' commissions are 12.5% of sales and are paid in the month of the sales. The sales manager's monthly salary will be $3,500 in April and $4,000 per month thereafter. 4. Monthly general and administrative expenses include $8,000 administrative salaries, $5,000 depreciation, and 0.9% monthly interest on the long-term note payable. 5. The company expects 30% of sales to be for cash and the remaining 70% on credit. Receivables are collected in full in the month following the sale (none is collected in the month of the sale). 6. All merchandise purchases are on credit, and no payables arise from any other transactions. One month's purchases are fully paid in the next month. 7. The minimum ending cash balance for all months is $50,000. If necessary, the company borrows enough cash using a short-term note to reach the minimum. Short-term notes require an interest payment of 1% at each month-end (before any repayment). If the ending cash balance exceeds the minimum, the excess will be applied to repaying the short-term notes payable balance. 8. Dividends of $100,000 are to be declared and paid in May. 6 9. No cash payments for income taxes are to be made during the second calendar quarter. Income taxes will be assessed at 35% in the quarter. 10. Equipment purchases of $55,000 are scheduled for June. Required Prepare the following budgets for each month and quarter and other financial information as required: 1. Sales budget, including budgeted sales for July. 2. Purchases budget, the budgeted cost of goods sold for each month and quarter, and the cost of the June 30 budgeted inventory. 3. Selling expense budget. 4. General and administrative expense budget. 5. Expected cash receipts from customers and the expected June 30 balance of accounts receivable. 6. Expected cash payments for purchases and the expected June 30 balance of accounts payable. 7. Cash budget. 8. Budgeted income statement for the quarter ended June 30, 2013 9. Budgeted statement of retained earnings for the quarter ended June 30, 2013 10. Budgeted balance sheet as of June 30, 2013 PLANNING THE SOLUTION Prepare the selling expense budget. Prepare the general and administrative expense budget. Determine the amounts of cash receipts in each month. Determine expected cash payments Prepare the cash budget by combining the given information and the amounts of cash receipts and cash payments on account that you computed. Complete the cash budget for 7 each month by either borrowing enough to raise the preliminary balance to the minimum or paying off short-term debt as much as the balance allows without falling below the minimum. Show the ending balance of the short-term note in the budget. Prepare the budgeted income statement by combining the budgeted items for all three months. Determine the income before income taxes. Prepare the budgeted statement of retained earnings Prepare the budgeted balance sheet includes updated balances for all. Amounts for all asset, liability, and equity accounts can be found either in the budgets, other calculations, or by adding amounts found there to the beginning balances. 8