Statement of Cash Flows: Indirect MethodP 5. Wu Company’s income statement for the year ended December 31, 2011,and its comparative…

Statement of Cash Flows: Indirect Method P 5. Wu Company’s income statement for the year ended December 31, 2011,and its comparative balance sheets as of December 31, 2011 and 2010, are presented on the next page. During 2011, Wu Company engaged in these transactions: a. Sold at a gain of $7,000 furniture and fixtures that cost $35,600, on which it had accumulated depreciation of $28,800. b. Purchased furniture and fixtures in the amount of $39,600. c. Paid a $20,000 note payable and borrowed $40,000 on a new note. d. Converted bonds payable in the amount of $100,000 into 4,000 shares of common stock. e. Declared and paid $6,000 in cash dividends. Wu Company Income Statement For the Year Ended December 31, 2011 Sales $1,609,000 Cost of goods sold 1,127,800 Gross margin $ 481,200 Operating expenses (including depreciation expense of $46,800) 449,400 Income from operations $ 31,800 Other income (expenses) Gain on sale of furniture and fixtures $ 7,000 Interest expense (23,200) (16,200) Income before income taxes $ 15,600 Income taxes expense 4,600 Net income $ 11,000 Wu Company Comparative Balance Sheets December 31, 2011 and 2010 2011 2010 Assets Cash $164,800 $ 50,000 Accounts receivable (net) 165,200 200,000 Merchandise inventory 350,000 450,000 Prepaid rent 2,000 3,000 Furniture and fixtures 148,000 144,000 Accumulated depreciation–furniture and fixtures (42,000) (24,000) Total assets $788,000 $823,000 Liabilities and Stockholders’ Equity Accounts payable $143,400 $200,400 Income taxes payable 1,400 4,400 Notes payable (long-term) 40,000 20,000 Bonds payable 100,000 200,000 Common stock, $20 par value 240,000 200,000 Additional paid-in capital 181,440 121,440 Retained earnings 81,760 76,760 Total liabilities and stockholders’ equity $788,000 $823,000 Using the indirect method, prepare a statement of cash flows for Wu Company. Include a supporting schedule of noncash investing transactions and financing transactions. 2. What are the primary reasons for Wu Company’s large increase in cash from 2010 to 2011, despite its low net income? 3. Compute and assess cash flow yield and free cash flow for 2011. Compare and contrast what these two performance measures tell you about Wu Company’s cash-generating ability.

Ch15 P5 (1)

flows from operating activities

tures

in accounts receivable

34,800

— 0

— 0

$45,800

$45,800

and

s

*

Chapter 15, P

5.

1.

Statement of cash flows prepare

d.

Wu Company

Statement of Cash Flows

For the Year Ended December 31,

2011

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flows from operating activities

Net income

$ 11,000

Adjustments to reconcile net income to net cash

Depreciation

Gain on sale of furniture and fi

x

Changes in current assets and current liabilities

Decrease

34,800

Decrease in merchandise inventory

Decrease in prepaid rent

Decrease in accounts payable

Decrease in income taxes payable

Net cash flows from operating activities

$45,800

Cash flows from investing activities

Sale of furniture and fixtures

*

$

— 0

Purchase of furniture and fixtures

Net cash flows from investing activities

Cash flows from financing activities

Repayment of notes payable

Issue of notes payable

Payment of dividends

Net cash flows from financing activities

Net increase (decrease) in cash

Cash at beginning of year

Cash at end of year

Schedule of

Noncash

Investing

Financing

Transaction

Conversion of bonds into common stock

$100,000

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Ch15 P5 (2)

Activities

2011 = =

=

Dividends –

Sales of Plant Assets

2011 = – – +
=

Chapter 15, P 5. (Continued)
	2.	User insight: Causes of increase in cash identified.
	3.	User insight: Computation and assessment of cash flow yield and free cash flow.
Cash Flow Yield						=	Net Cash Flows from	Operating
Net Income
times
Free Cash Flow	Net Cash Flows from Operating Activities		–
Purchases of Plant Assets	+
$ — 0
Answer

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*
+

Ch15 P1

on Cash Flows

Operating Investing Financing Noncash
Transaction

Activity Activity Transaction

Decrease

1.

x x

2.

x x

3.

5.

x

dividend.

x

x x

with cash.

x x

x

x

x x

x x

Chapter 15, P 1.
Cash Flow Classification		Effect
		Activity		Increase	No Effect
Paid a cash	dividend.
Decreased accounts	receivabl	e.
Increased inventory.
4.	Incurred a net loss.
Declared and issued a stock
6.	Retired long-term debt	with cas	h.
7.	Sold available-for-sale securities
at a loss.
8.	Issued stock for equipment.
9.	Decreased prepaid insurance.
10.	Purchased treasury stock
11.	Retired a fully depreciated truck
(no gain or loss).
12.	Increased interest payable.
13.	Decreased dividends receivable
on investment.
14.	Sold treasury stoc	k.
15.	Increased income taxes payable.
16.	Transferred cash to money
market	account.
17.	Purchased land and building
with a mortgage.
*Cash equivalent.

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Ch16 P5

Effect
Transaction

Increase Decrease

Sold merchandise on account.

receivable.

d.

account.

e.

Current ratio

h.

Current ratio

k.

cash dividend.

expense.

*

Chapter 16, P 5.
Ratio	None
a.		Sold merchandise on account.			Current ratio
b.	Inventory turnover
c.	Collected on accounts
Quick ratio
Wrote off an uncollectible
Receivable turnover
Paid on accounts payable.
f.	Declared	cash dividend.	Return on equity
g.	Incurred advertising	expense.	Profit margin
Issued stock dividend.	Debt to equity ratio
i.	Issued bonds payable.	Asset turnover
j.	Accrued interest expense.
Paid previously declared
Dividends yield
l.	Purchased treasury stock.	Return on assets
m.	Recorded depreciation
Cash flow yield
Assumes perpetual inventory system.
**	Assumes an allowance for uncollectible accounts is used.
***	Answer assumes a ratio before the transaction of >1. If the ratio were <1, the
effect would be a decrease.

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