Village Markets, Inc.

Statement of Cash Flows

Refer to the attached 2016 financial statements of Village Markets, Inc.

Conceptual questions:

1.What information does the statement of cash flows provide? How is this different from the information contained in the income statement?

2.What are the three sections of the statement of cash flows?How do each of the three sections of the statement of cash flows relate to the Balance Sheet?

3.The balance sheet includes an item called "Cash and cash equivalents." What are "cash equivalents"?

4.Net income is determined on an accrual basis. Yet, net income is the first item on the statement of cash flows. Explain this apparent inconsistency.

Process question:

5. What would a 2016 statement of cash flows for Village Markets look like using the indirect method. Please use the template provided on page 13 to present your statement of cash flows.

Recall that the change in cash (i.e., the statement of cash flows) is algebraically related to the balance sheet as follows:

? Cash = ? Liabilities + ? Owners' Equity - ? All Other Assets

Thus, if you can "explain" the change in each of the non-cash balance sheet accounts (and only those accounts), you will have generated a statement of cash flows.

Use a set of T-accounts for the balance sheet accounts (T-account templates are included on pages 8 through 10 of the case). For each balance sheet, consider what transactions and activities explain the change in the account. Classify each transaction and activity as operating, investing or financing to prepare the statement of cash flows for Village Markets. Please be sure to turn in your t-accounts with this case.

The following five items provide additional information to help you prepare the statement of cash flows. All dollar amounts are in thousands.

a. Note 4 to Village Markets' 2016 financial statements reveals the following:

(4) Property and Equipment

Property and equipment, as of December 31, 2016 and December 31, 2015, consisted of:

(dollars in thousands)

Useful Life

(in years)

2016

2015

Land

$84,094

$84,094

Buildings and Improvements

10-60

406,164

391,357

Equipment

3-12

608,458

585,213

Leasehold Improvements

5-20

130,978

121,263

Total, at cost

1,229,694

1,181,927

Less accumulated depreciation and amortization

730,238

689,384

Property and equipment, net

$499,456

$492,543

In 2016, depreciation and amortization expense on property and equipment was $49,290. In April, 2016, the company purchased $67,748 of new property, plant, and equipment. The company used cash to fund 30% of the total cost property and equipment and financed the balance with a note to Fourth Bank & Trust (see item (d) below for details of the new loan). The company sold property and equipment for $9,620 in cash during 2016. No other property and equipment was acquired or sold in 2016.

5(a) continued.

Activities in the fixed asset accounts affect the statement of cash flows in four ways. Determine each of the four items, i through iv, below. To accomplish this, create two T-accounts, one for property and equipment at cost and another for accumulated depreciation and amortization. Use the information from Village Markets' Note 4 to analyze the activity in both accounts during the year.

i.Depreciation and amortization expense is included in the operating section of the statement of cash flows. Explain why. Does depreciation expense actually generate cash for Weis Markets?

ii.Capital expenditures (i.e. cash used to purchase new property and equipment) are included in the investing section of the statement of cash flows as a use of cash.

iii.Cash proceeds from the disposal of property and equipment are included in the investing section as a source of cash.

iv.Gains and losses on disposals of fixed assets are included in the operating section of the statement of cash flows.

b. Village Markets did not purchase any new intangible assets in 2016. Amortization expense for the year was directly credited to the Intangible assets account. Analyze the activity in the Intangible and other assets, net account during 2016 using the t-account worksheet provided.

c. Short-term investments at December 31, 2016 consist solely of investments in 1-year certificates of deposit with a maturity date of September 1, 2017. There were no outstanding investments at December 31, 2015. No sales or maturities of investment securities occurred during fiscal 2016. Analyze the activity in the Short-term Investment account during 2016 using the t-account worksheet provided.

5 d. On April 1, 2016, the company borrowed $47,424 from Fourth Bank & Trust to help fund the purchase of property and equipment (see item (a) above). Details of the outstanding note are as follows:

December 31

2016

2015

6% note payable to Fourth Bank & Trust, issued on April 1, 2016, requiring quarterly principal payments of $1,248, plus interest beginning on July 1, 2016 through December, 2025.

$44,928

$0

Less current portion

(4,992)

(0)

Long-term portion of notes payable

$39,936

$0

Analyze the activity in the note payable account during 2016 using the t-account worksheet provided. Note: it is easiest to combine the current and long-term note payable accounts when analyzing the activity.

Analysis questions:

6.Use the 2016 statement of cash flows you constructed, the statements of cash flow for 2015 and 2014, and the statements of income for 2014 through 2016, to evaluate Village Markets' profitability and ability to generate cash. Comment on the nature of the differences between net income and cash from operations in each year.

7. Refer to the company's statements of cash flows for 2014 through 2016. Has Village Markets maintained its productive capacity, expanded it or decreased it over the last three years?Explain.

8.Consider the following January 15, 2017 press release by Village Markets relating to planned capital expenditures:

(Chicago, IL) -- Village Markets, Inc.'s Vice Chairman Jonathan Weisman today said his company would invest $90 million in its growth over the next twelve months. Mr. Weisman made the announcement at his company's annual shareholder meeting, which was held in Chicago earlier today.

"For the coming year, we plan to invest nearly $90 million in our growth. We will target three quarters of this budget to our store base," said Mr. Weisman. "We currently have 19 major projects in various stages of planning, including three new stores, two replacement units, nine additions and five remodels."

Mr. Weisman noted this is nearly a 33% increase over 2016, when his company made $67.7 million in capital expenditures.

Discuss Village Markets' capacity for increasing its capital expenditures. What are the likely sources of cash to fund the increased level of investment in property and equipment?

The T-accounts for all the balance sheet accounts are as follows:

Cash and cash equivalents

Opening Balance

65,708

Operating activities

Net Income

Investing activities

Financing activities

Closing Balance

53,566

T-accounts for all the balance sheet accounts (continued):

Short-term investments

Accounts receivable

Inventory

Prepaid expenses

Property and equipment, gross

Accumulated depreciation

Goodwill

Intangibles and

other assets, net

Accounts payable

Accrued salaries

Dividends payable

Income taxes payable

Other accrued expenses

Long-term notes payable

(incl. current portion)

Common stock

Retained earnings

VILLAGE MARKETS, INC.

CONSOLIDATED BALANCE SHEETS

(dollars in thousands)

December 31

2016

2015

Assets

Current:

Cash and cash equivalents

$

53,566

$

65,708

Short-term investments

19,256

0

Accounts receivable

48,246

41,885

Inventories

189,223

189,468

Prepaid expenses

3,144

3,932

Total current assets

313,435

300,993

Property and equipment, net

499,456

492,543

Goodwill

15,722

15,722

Intangible and other assets, net

4,322

4,804

Total assets

$

832,935

$

814,062

Liabilities

Current:

Accounts payable

$

70,892

$

105,859

Current portion of long-term debt

4,992

--

Accrued salaries

16,759

22,307

Dividends payable

7,202

6,912

Income taxes payable

16,187

22,778

Other accrued expenses

26,043

33,127

Total current liabilities

142,075

190.983

Long-term debt

39,936

--

Total liabilities

182,011

190,983

Shareholders' Equity

Common stock, no par value, 100,800,000 shares authorized, 33,044,357 and 33,009,046 shares issued, respectively

10,040

8,595

Retained earnings

640,884

614,484

Total shareholders' equity

650,924

623,079

Total liabilities and shareholders' equity

$

832,935

$

814,062

See accompanying notes to consolidated financial statements.

VILLAGE MARKETS, INC.

CONSOLIDATED STATEMENTS OF INCOME

(dollars in thousands, except shares and per share amounts)

For the Fiscal Years Ended December 31,

2016

2015

2014

Net sales

$2,318,551

$2,244,512

$2,222,598

Cost of sales, including warehousing and distribution expenses

1,716,424

1,647,233

1,634,874

Gross profit on sales

602,127

597,279

587,724

Operating, general and administrative expenses

527,378

515,675

491,499

Income from operations

74,749

81,604

96,225

Investment income

3,010

4,484

3,081

Income before provision for income taxes

77,759

86,088

99,306

Provision for income taxes

26,769

30,078

35,885

Net income

$ 50,990

$ 56,010

$63,421

Weighted-average shares outstanding, basic

26,987,786

27,016,877

27,026,748

Weighted-average shares outstanding, diluted

26,993,997

27,027,198

27,033,789

Cash dividends per share

$ 1.16

$ 1.16

$1.12

Basic and diluted earnings per share

$ 1.89

$ 2.07

$2.35

See accompanying notes to consolidated financial statements.

VILLAGE MARKETS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(dollars in thousands)

For the Fiscal Years Ended December 31

2016

2015

2014

Cash flows from operating activities:

Net income

$

$56,010

$63,421

Adjustments to reconcile net income to

net cash provided by operating activities:

Depreciation and amortization of property and equipment

50,288

49,215

Amortization of intangible assets

732

891

(Gain) loss on disposition of fixed assets

974

519

(Gain) loss on sale of short-term investments

431

(422

)

Changes in operating assets and liabilities:

Accounts receivable

(10,086

)

(8,338

)

Inventories

(1,365

)

(3,424

)

Prepaid expenses

1,592

1,729

Accounts payable

10,277

7,636

Accrued salaries

8,429

(5,291

)

Income taxes payable

(5,762

)

(2,845

)

Other accrued expenses

1,125

1,311

Net cash provided by operating activities

112,645

104,402

Cash flows from investing activities:

Purchase of property and equipment

(59,975

)

(55,468

)

Proceeds from the sale of property and equipment

2,696

291

Purchase of short-term investments

(33,020

)

(8,248

)

Proceeds from the sale of short-term investments

554

902

Net cash used in investing activities

(89,745

)

(62,523

)

Cash flows from financing activities:

Proceeds from issuance of common stock

224

172

Dividends paid

(25,344

)

(30,270

)

Proceeds from issuance of note payable

--

--

Payments on notes payable

(1,372

)

(715

)

Net cash provided by (used in) financing activities

(26,492

)

(30,813

)

Net increase (decrease) in cash and cash equivalents

(3,592

)

11,066

Cash and cash equivalents at beginning of year

69,300

58,234

Cash and cash equivalents at end of year

$

$ 65,708

$69,300

ACTG 500 Introduction to Financial Accounting Fall 2017 Engel Professor Ellen PROBLEM SET #3 DUE AT THE START OF CLASS ON MONDAY, OCTOBER 9th (Monday afternoon section) TUESDAY, OCTOBER 10th (Tuesday evening section) Please turn in this entire packet with your solutions. This homework should be submitted in class as a paper copy. DO NOT EMAIL ME YOUR HOMEWORK. Show all of your work to receive maximum credit. You may discuss the assignment with other students, but each student must turn in their own independent work. Print Name: _____________________________________________ Honor Code Statement: I pledge my honor that I have not violated the Honor Code during this assignment. I recognize that this is an individual assignment and I have not consulted any other individuals in preparing this assignment. Signature: Village Markets, Inc. ________________________________ 2 Village Markets, Inc. Statement of Cash Flows Refer to the attached 2016 financial statements of Village Markets, Inc. Conceptual questions: 1. What information does the statement of cash flows provide? How is this different from the information contained in the income statement? 2. What are the three sections of the statement of cash flows? How do each of the three sections of the statement of cash flows relate to the Balance Sheet? 3. The balance sheet includes an item called \"Cash and cash equivalents.\" What are \"cash equivalents\"? 4. Net income is determined on an accrual basis. Yet, net income is the first item on the statement of cash flows. Explain this apparent inconsistency. Village Markets, Inc. 3 Process question: 5. Prepare a 2016 statement of cash flows for Village Markets using the indirect method. Please use the template provided on page 13 to present your statement of cash flows. Recall that the change in cash (i.e., the statement of cash flows) is algebraically related to the balance sheet as follows: Cash = Liabilities + Owners' Equity - All Other Assets Thus, if you can \"explain\" the change in each of the non-cash balance sheet accounts (and only those accounts), you will have generated a statement of cash flows. Use a set of T-accounts for the balance sheet accounts (T-account templates are included on pages 8 through 10 of the case). For each balance sheet, consider what transactions and activities explain the change in the account. Classify each transaction and activity as operating, investing or financing to prepare the statement of cash flows for Village Markets. Please be sure to turn in your t-accounts with this case. The following five items provide additional information to help you prepare the statement of cash flows. All dollar amounts are in thousands. a. Note 4 to Village Markets' 2016 financial statements reveals the following: (4) Property and Equipment Property and equipment, as of December 31, 2016 and December 31, 2015, consisted of: Useful Life 2016 2015 (dollars in thousands) (in years) Land Buildings and Improvements Equipment Leasehold Improvements 10-60 3-12 5-20 $84,094 406,164 608,458 130,978 $84,094 391,357 585,213 121,263 1,181,92 Total, at cost Less accumulated depreciation and amortization Property and equipment, net 1,229,694 7 730,238 689,384 $499,456 $492,543 In 2016, depreciation and amortization expense on property and equipment was $49,290. In April, 2016, the company purchased $67,748 of new property, plant, and equipment. The company used cash to fund 30% of the Village Markets, Inc. 4 total cost property and equipment and financed the balance with a note to Fourth Bank & Trust (see item (d) below for details of the new loan). The company sold property and equipment for $9,620 in cash during 2016. No other property and equipment was acquired or sold in 2016. Village Markets, Inc. 5 5(a) continued. Activities in the fixed asset accounts affect the statement of cash flows in four ways. Determine each of the four items, i through iv, below. To do this, create two T-accounts, one for property and equipment at cost and another for accumulated depreciation and amortization. Use the information from Village Markets' Note 4 to analyze the activity in both accounts during the year. i. Depreciation and amortization expense is included in the operating section of the statement of cash flows. Explain why. Does depreciation expense actually generate cash for Weis Markets? ii. Capital expenditures (i.e. cash used to purchase new property and equipment) are included in the investing section of the statement of cash flows as a use of cash. iii. Cash proceeds from the disposal of property and equipment are included in the investing section as a source of cash. iv. Gains and losses on disposals of fixed assets are included in the operating section of the statement of cash flows. b. Village Markets did not purchase any new intangible assets in 2016. Amortization expense for the year was directly credited to the Intangible assets account. Analyze the activity in the Intangible and other assets, net account during 2016 using the t-account worksheet provided. Village Markets, Inc. 6 c. Short-term investments at December 31, 2016 consist solely of investments in 1-year certificates of deposit with a maturity date of September 1, 2017. There were no outstanding investments at December 31, 2015. No sales or maturities of investment securities occurred during fiscal 2016. Analyze the activity in the Short-term Investment account during 2016 using the t-account worksheet provided. 5 d. On April 1, 2016, the company borrowed $47,424 from Fourth Bank & Trust to help fund the purchase of property and equipment (see item (a) above). Details of the outstanding note are as follows: December 31 2016 6% note payable to Fourth Bank & Trust, issued on April 1, 2016, requiring quarterly principal payments of $1,248, plus interest beginning on July 1, 2016 through December, 2025. Less current portion Long-term portion of notes payable 201 5 $44,92 8 $ 0 (4,992 ) (0) $39,93 6 $ 0 Analyze the activity in the note payable account during 2016 using the taccount worksheet provided. Note: it is easiest to combine the current and long-term note payable accounts when analyzing the activity. Village Markets, Inc. 7 Village Markets, Inc. 8 Analysis questions: 6. Use the 2016 statement of cash flows you constructed, the statements of cash flow for 2015 and 2014, and the statements of income for 2014 through 2016, to evaluate Village Markets' profitability and ability to generate cash. Comment on the nature of the differences between net income and cash from operations in each year. 7. Refer to the company's statements of cash flows for 2014 through 2016. Has Village Markets maintained its productive capacity, expanded it or decreased it over the last three years? Explain. Village Markets, Inc. 9 Village Markets, Inc. 10 8. Consider the following January 15, 2017 press release by Village Markets relating to planned capital expenditures: (Chicago, IL) -- Village Markets, Inc.'s Vice Chairman Jonathan Weisman today said his company would invest $90 million in its growth over the next twelve months. Mr. Weisman made the announcement at his company's annual shareholder meeting, which was held in Chicago earlier today. \"For the coming year, we plan to invest nearly $90 million in our growth. We will target three quarters of this budget to our store base,\" said Mr. Weisman. \"We currently have 19 major projects in various stages of planning, including three new stores, two replacement units, nine additions and five remodels.\" Mr. Weisman noted this is nearly a 33% increase over 2016, when his company made $67.7 million in capital expenditures. Discuss Village Markets' capacity for increasing its capital expenditures. What are the likely sources of cash to fund the increased level of investment in property and equipment? Village Markets, Inc. 11 The T-accounts for all the balance sheet accounts are as follows: Cash and cash equivalents Opening Balance 65,708 Operating activities Net Income Investing activities 12 Financing activities Closing Balance 53,566 13 T-accounts for all the balance sheet accounts (continued): Short-term investments Accounts receivable Inventory Prepaid expenses Property and equipment, gross Accumulated depreciation Goodwill Intangibles and Accounts payable other assets, net Accrued salaries Dividends payable Income taxes payable 14 Other accrued expenses Long-term notes payable Common stock (incl. current portion) Retained earnings VILLAGE MARKETS, INC. CONSOLIDATED BALANCE SHEETS (dollars in thousands) December 31 2016 2015 Assets Current: 15 Cash and cash equivalents $ 53,566 $ 65,708 Short-term investments 19,256 0 Accounts receivable 48,246 41,885 189,223 189,468 3,144 3,932 313,435 300,993 499,456 492,543 15,722 15,722 4,322 4,804 Inventories Prepaid expenses Total current assets Property and equipment, net Goodwill Intangible and other assets, net Total assets $ 832,935 $ 814,062 $ 70,892 $ 105,859 Liabilities Current: Accounts payable Current portion of long-term debt 4,992 -- 16,759 22,307 7,202 6,912 Income taxes payable 16,187 22,778 Other accrued expenses 26,043 33,127 142,075 190.983 39,936 -- 182,011 190,983 10,040 8,595 Accrued salaries Dividends payable Total current liabilities Long-term debt Total liabilities Shareholders' Equity Common stock, no par value, 100,800,000 shares authorized, 33,044,357 and 33,009,046 shares issued, 16 respectively Retained earnings Total shareholders' equity Total liabilities and shareholders' equity $ 640,884 614,484 650,924 623,079 832,935 $ 814,062 See accompanying notes to consolidated financial statements. 17 VILLAGE MARKETS, INC. CONSOLIDATED STATEMENTS OF INCOME (dollars in thousands, except shares and per share amounts) For the Fiscal Years Ended December 31, 2016 2015 2014 Net sales $2,318,55 1 Cost of sales, including warehousing and distribution expenses 1,716,424 1,647,233 1,634,874 602,127 597,279 587,724 527,378 515,675 491,499 74,749 81,604 96,225 3,010 4,484 3,081 77,759 86,088 99,306 26,769 30,078 35,885 $ 50,990 $ 56,010 $ 63,421 Gross profit on sales Operating, general and administrative expenses Income from operations Investment income Income before provision for income taxes Provision for income taxes Net income $2,244,512 $2,222,598 Weighted-average shares outstanding, basic 26,987,786 27,016,877 27,026,748 Weighted-average shares outstanding, diluted 26,993,997 27,027,198 27,033,789 Cash dividends per share $ 1.16 $ 1.16 $ 1.12 18 Basic and diluted earnings per share $ 1.89 $ 2.07 $ 2.35 See accompanying notes to consolidated financial statements. 19 VILLAGE MARKETS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (dollars in thousands) For the Fiscal Years Ended December 31 2016 2015 2014 Cash flows from operating activities: Net income $ $ 56,010 $ 63,421 50,288 49,215 Amortization of intangible assets 732 891 (Gain) loss on disposition of fixed assets 974 519 (Gain) loss on sale of short-term investments 431 (422) (10,086) (8,338) Inventories (1,365) (3,424) Prepaid expenses 1,592 1,729 Accounts payable 10,277 7,636 Accrued salaries 8,429 (5,291) Income taxes payable (5,762) (2,845) Other accrued expenses 1,125 1,311 112,645 104,402 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization of property and equipment Changes in operating assets and liabilities: Accounts receivable Net cash provided by operating activities Cash flows from investing activities: 20 Purchase of property and equipment (59,975) Proceeds from the sale of property and equipment (55,468) 2,696 Purchase of short-term investments 291 (33,020) Proceeds from the sale of short-term investments (8,248) 554 Net cash used in investing activities 902 (89,745) (62,523) 224 172 (25,344 ) (30,270) -- -- (1,372) (715) Net cash provided by (used in) financing activities (26,492) (30,813) Net increase (decrease) in cash and cash equivalents (3,592) 11,066 Cash and cash equivalents at beginning of year 69,300 58,234 Cash flows from financing activities: Proceeds from issuance of common stock Dividends paid Proceeds from issuance of note payable Payments on notes payable Cash and cash equivalents at end of year $ $ 65,708 $ 69,300 See accompanying notes to consolidated financial statements. 21