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Monday, 15 August 2011

Preparation of Cash Flow Statement


                              E6-5:        (Computation of Present Value) Using the appropriate interest table, compute the present values of the following periodic amounts due at the end of the designated periods.
                          1.     $30,000 receivable at the end of each period for 8 periods compounded at 12%.                                                                                                                                                          
                            2.     $30,000 payments to be made at the end of each period for 16 periods at 9%.     
            3.      $30,000 payable at the end of the seventh, eighth, ninth, and tenth periods at 12%.

                       E6-10       (Unknown Periods and Unknown Interest Rate) Consider the following independent situations.
1.      Mike Finley wishes to become a millionaire. His money market fund has a balance of $92,296 and has a guaranteed interest rate of 10%. How many years must Mike leave that balance in the fund in order to get his desired $1,000,000?
2.      Assume that Serena Williams desires to accumulate $1 million in 15 years using her money market fund balance of $182,696. At what interest rate must Serena's investment compound annually?

E23-11      (SCF—Indirect Method) Condensed financial data of Pat Metheny Company for 2008 and 2007 are presented.
PAT METHENY COMPANY
COMPARATIVE BALANCE SHEET
AS OF DECEMBER 31, 2008 AND 2007


2008
2007
Cash
$1,800 
$1,150 
Receivables
1,750 
1,300 
Inventory
1,600 
1,900 
Plant assets
1,900 
1,700 
Accumulated depreciation
(1,200)
(1,170)
Long-term investments (Held-to-maturity)
1,300 
1,420 

$7,150 
$6,300 
Accounts payable
$1,200 
$  900 
Accrued liabilities
200 
250 
Bonds payable
1,400 
1,550 
Capital stock
1,900 
1,700 
Retained earnings
2,450 
1,900 

$7,150 
$6,300 




PAT METHENY COMPANY
INCOME STATEMENT
FOR THE YEAR ENDED DECEMBER 31, 2008

Sales
$6,900
Cost of goods sold
4,700
Gross margin
2,200
Selling and administrative expense
930
Income from operations
1,270
Other revenues and gains

Gain on sale of investments
80
Income before tax
1,350
Income tax expense
540
Net income
810
Cash dividends
260
Income retained in business
$  550



Additional information: During the year, $70 of common stock was issued in exchange for plant assets. No plant assets were sold in 2008.
                       Instructions
                       Prepare a statement of cash flows using the indirect method.

                E23-12           (SCF—Direct Method) Data for Pat Metheny Company are presented in E23-11
                Instructions
                Prepare a statement of cash flows using the direct method. (Do not prepare a reconciliation schedule.)

 P23-7             (SCF—Direct and Indirect Methods from Comparative Financial Statements) George Winston Company, a major retailer of bicycles and accessories, operates several stores and is a publicly traded company. The comparative statement of financial position and income statement for Winston as of May 31, 2008, are shown on the next page. The company is preparing its statement of cash flows.
                                                                       
GEORGE WINSTON COMPANY
COMPARATIVE STATEMENT OF FINANCIAL POSITION
AS OF MAY 31
                                                                                   
                                                                       

2008
2007
Current assets


Cash
$ 33,250
$ 20,000
Accounts receivable
80,000
58,000
Merchandise inventory
210,000
250,000
Prepaid expenses
9,000
7,000
Total current assets
332,250
335,000
                                                                                   
Plant assets


Plant assets
600,000
502,000
Less: Accumulated depreciation
150,000
125,000
Net plant assets
450,000
377,000
Total assets
$782,250
$712,000
                                                                                   
Current liabilities


Accounts payable
$123,000
$115,000
Salaries payable
47,250
72,000
Interest payable
27,000
25,000
Total current liabilities
197,250
212,000
                                                                                   
Long-term debt


Bonds payable
70,000
100,000
Total liabilities
267,250
312,000
Shareholders' equity


Common stock, $10 par
370,000
280,000
Retained earnings
145,000
120,000
Total shareholders' equity
515,000
400,000
Total liabilities and shareholders' equity
$782,250
$712,000





                                                                       
GEORGE WINSTON COMPANY
INCOME STATEMENT
FOR THE YEAR ENDED MAY 31, 2008
                                                                                   
Sales
$1,255,250
Cost of merchandise sold
722,000
Gross profit
533,250
Expenses

Salary expense
252,100
Interest expense
75,000
Other expenses
8,150
Depreciation expense
25,000
Total expenses
360,250
Operating income
173,000
Income tax expense
43,000
Net income
$ 130,000



The following is additional information concerning Winston's transactions during the year ended May 31, 2008.

1.      All sales during the year were made on account.
2.    All merchandise was purchased on account, comprising the total accounts payable account.
3.     Plant assets costing $98,000 were purchased by paying $48,000 in cash and issuing 5,000 shares of stock.
4.    The “other expenses” are related to prepaid items.
5.    All income taxes incurred during the year were paid during the year.
6.    In order to supplement its cash, Winston issued 4,000 shares of common stock at par value.
7.    There were no penalties assessed for the retirement of bonds.
8.    Cash dividends of $105,000 were declared and paid at the end of the fiscal year.
Instructions
  1.             Compare and contrast the direct method and the indirect method for reporting cash flows from operating activities.
  2.             Prepare a statement of cash flows for Winston Company for the year ended May 31, 2008, using the direct method. Be sure to support the statement with appropriate calculations. (A reconciliation of net income to net cash provided is not required.)

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