Solution Manual inancial Accounting 6th Kieso Kimmel Ch13 PDF

Preview

Summary

Kimmel, Weygandt, Kieso, Trenholm, Irvine Financial Accounting, Sixth Canadian Edition CHAPTER 13 Statement of Cash Flows ASSIGNMENT CLASSIFICATION TABLE Study Objectives Questions 1. Describe the purpose and content of the statement of cash flows. 1, 2, 3, 4, 5 2. Prepare the operating activities s...

Description

Kimmel, Weygandt, Kieso, Trenholm, Irvine

Financial Accounting, Sixth Canadian Edition

CHAPTER 13 Statement of Cash Flows ASSIGNMENT CLASSIFICATION TABLE

Study Objectives

Questions

1. Describe the purpose and content of the statement of cash flows.

1, 2, 3, 4, 5

2. Prepare the operating activities section of a statement of cash flows using one of two approaches:

6, 7, 8, 14, 16, 17

Brief Exercises

Exercises

A Problems

B Problems

1, 2, 3

1, 2

1A

1B

1, 3, 5

3, 13

11A

11B

1, 7

BYP

(a) the indirect method or 9, 10, 11

3, 4, 5

4, 5, 8, 9, 12

2A, 3A, 2B, 3B, 6A, 7A, 8A 6B, 7B, 8B

(b) the direct method.

12, 13, 15

6, 7, 8, 9, 10

6, 7, 10, 12

2A, 3A, 6A, 7A

2B, 3B, 6B, 7B

6

3. Prepare the investing activities section of a statement of cash flows.

14, 15, 17

11, 12

8, 9, 11, 12, 13

4A, 6A, 7A, 8A, 11A

4B, 6B, 7B, 8B, 11B

1, 7

4. Prepare the financing activities section of a statement of cash flows.

15, 16, 17

13, 14

8, 9, 11, 12, 13

5A, 6A, 7A, 8A, 11A

5B, 6B, 7B, 8B, 11B

1, 7

5. Complete the statement of cash flows.

18

8, 9, 12

6A, 7A, 8A, 11A

6B, 7B, 8B, 11B

1, 6, 7

6. Use the statement of cash flows to evaluate a company’s liquidity and solvency.

19, 20, 21, 22, 23

8, 9, 13, 14

9A, 10A

9B, 10B

2, 3, 4, 7

15, 16, 17

Solutions Manual 13-1 Chapter 13 Copyright © 2014 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is strictly prohibited.

Kimmel, Weygandt, Kieso, Trenholm, Irvine

Financial Accounting, Sixth Canadian Edition

ASSIGNMENT CHARACTERISTICS TABLE Problem Number

Description

Difficulty Level

Time Allotted (min.)

Simple

20-30

1A

Classify activities.

2A

Prepare operating activities section—indirect and direct methods.

Moderate

30-40

3A

Prepare operating activities section—indirect and direct methods—and discuss methods.

Moderate

30-40

4A

Calculate and classify cash flows for property, plant, and equipment.

Moderate

20-30

5A

Calculate and classify cash flows for shareholders’ equity.

Moderate

20-30

6A

Prepare statement of cash flows—indirect and direct methods.

Moderate

30-40

7A

Prepare statement of cash flows—indirect and direct methods.

Moderate

50-60

8A

Prepare statement of cash flows (indirect method) and answer questions.

Complex

40-50

9A

Calculate and evaluate liquidity and solvency.

Moderate

20-30

10A

Evaluate liquidity and solvency.

Moderate

20-30

11A

Compare cash flows for three companies.

Moderate

20-30

1B

Classify activities.

Simple

20-30

2B

Prepare operating activities section—indirect and direct methods.

Moderate

40-50

3B

Prepare operating activities section—indirect and direct methods—and discuss methods.

Moderate

50-60

4B

Calculate and classify cash flows for property, plant, and equipment.

Moderate

20-30

5B

Calculate and classify cash flows for shareholders’ equity.

Moderate

30-40

Solutions Manual 13-2 Chapter 13 Copyright © 2014 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is strictly prohibited.

Kimmel, Weygandt, Kieso, Trenholm, Irvine

Financial Accounting, Sixth Canadian Edition

ASSIGNMENT CHARACTERISTICS TABLE (Continued) Problem Number

Description

Difficulty Level

Time Allotted (min.)

6B

Prepare statement of cash flows—indirect and direct methods.

Moderate

30-40

7B

Prepare statement of cash flows—indirect and direct methods.

Moderate

50-60

8B

Prepare statement of cash flows (indirect method) and answer questions.

Complex

40-50

9B

Calculate and evaluate liquidity and solvency.

Moderate

20-30

10B

Evaluate liquidity and solvency.

Moderate

20-30

11B

Compare cash flows for three companies.

Moderate

20-30

Solutions Manual 13-3 Chapter 13 Copyright © 2014 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is strictly prohibited.

Kimmel, Weygandt, Kieso, Trenholm, Irvine

Financial Accounting, Sixth Canadian Edition

ANSWERS TO QUESTIONS 1.

The statement of cash flows reports the cash receipts, cash payments, and net change in cash resulting from the operating, investing, and financing activities of a company during a period, in a format that reconciles the beginning and ending cash balances. The statement of cash flows is useful because it helps investors, lenders and other creditors, as well as other users, assess the following aspects of a company’s financial position: • the reasons for the difference between profit and cash provided (used) by operating activities. • the cash investing and financing transactions during a period. • the company’s ability to generate future cash flows.

2.

Cash equivalents are short-term, highly-liquid investments that are readily convertible to known amounts of cash. Generally, only debt investments with original maturities of three months or less qualify under this definition. Bank overdrafts that are repayable on demand are also included (deducted from) cash equivalents. The statement of cash flows may be prepared using cash, or cash and cash equivalents as its base. If the latter, cash equivalents must be clearly defined.

3.

Operating activities include the cash flow activities arising from a company’s principal revenue-producing activities and all other activities that are not investing or financing activities. Investing activities are those arising from the acquisition and disposal of non-current assets. Financing activities include those resulting in changes in the size and composition of the equity and borrowings of a company.

4.

Companies following ASPE classify interest paid, interest revenue, and dividend revenue, as part of operating activities because they are disclosed on the income statement as part of profit. Dividend payments are classified as financing activities. This is the most common practice for both publicly traded and private companies. Companies following IFRS may classify interest and dividend revenue as either investing activities or operating activities; and interest and dividend payments as either financing activities or operating activities. Companies select where these payments and receipts will be presented and must apply the presentation consistently.

5.

Examples of noncash transactions include the issue of shares or a mortgage to purchase property, plant, and equipment. In both cases, cash is not involved. Noncash transactions should be reported in the notes to the financial statements and crossreferenced to the statement of cash flows, but not reported as investing and financing activities in the body of the statement of cash flows.

Solutions Manual 13-4 Chapter 13 Copyright © 2014 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is strictly prohibited.

Kimmel, Weygandt, Kieso, Trenholm, Irvine

Financial Accounting, Sixth Canadian Edition

Answers to Questions (Continued) 6. (a) and (b) (1) The adjusted trial balance is not required to prepare the statement of cash flows because it does not provide necessary data. (2) A comparative statement of financial position is required to obtain the changes in individual asset, liability, and equity balances. Changes in the noncash working capital (current) accounts may affect the operating activities, changes in short-term investment and long-lived asset accounts may affect the investing activities, and changes in non-current liability and equity accounts may affect the financing activities reported in the statement of cash flows. (3) The income statement is required to obtain the elements of operating activities, which will be converted from the accrual basis to the cash basis. The income statement is also required to identify noncash revenues and expenses such as depreciation and amortization expenses and accounting gains and losses. (4) The statement of comprehensive income is needed to reconcile certain fair-valued assets (e.g., revaluation of the fair value of land) and equity (e.g., accumulated other comprehensive income) accounts appearing in the statement of financial position. However, changes in comprehensive income do not affect cash and are not reported on the statement of cash flows. (5) The statement of changes in equity will provide details of the changes in the share capital and retained earnings accounts. From these, the cash effects of financing transactions with shareholders, such as the issue or reacquisition of shares and/or payment of dividends, can be determined and reported as financing activities on the statement of cash flows. 7.

Although the approaches and format are different, both the direct and indirect methods will produce the same net cash provided by operating activities.

8.

A number of factors could have caused net cash provided by operating activities to exceed profit. These include (1) a high amount of collections of unearned revenue; (2) large amounts of depreciation or amortization; and (3) accounting losses. These are non-cash items deducted in arriving at profit so they are now added back to profit when determining net cash flow provided by operating activities thereby making it higher than profit.

Solutions Manual 13-5 Chapter 13 Copyright © 2014 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is strictly prohibited.

Kimmel, Weygandt, Kieso, Trenholm, Irvine

Financial Accounting, Sixth Canadian Edition

Answers to Questions (Continued) 9.

The indirect method involves converting accrual-based profit to net cash provided by operating activities. This is done by starting with accrual-based profit from the income statement and adding or subtracting noncash items included in profit. Examples of adjustments include adding back noncash expenses, such as depreciation, and removing any noncash gains or losses from profit. Then changes in the balances of noncash current asset and current liability accounts from one period to the next are added or subtracted.

10.

Under the indirect method, depreciation and amortization expense is added back to profit to reconcile profit to net cash provided by operating activities because depreciation and amortization are expenses that have reduced profit, but do not result in the use of cash. Adding them back cancels the expenses reported in the income statement, as accrual profit is the starting point under the indirect method. Example:

Profit before depreciation $5,000 Less: Depreciation expense (1,000) Profit 4,000 Add: Depreciation expense 1,000 Cash provided by operating activities $5,000

11.

Under the indirect method, a gain on disposal of equipment is deducted from profit to reconcile profit to net cash provided by operating activities. A gain is the difference between the cash proceeds received when the asset is sold and the carrying amount of the asset. This gain is not a cash receipt or payment. Therefore, the noncash gain, which was included in profit, must be deducted from profit on the statement of cash flows to convert profit to net cash provided by operating activities. The total cash proceeds received when the asset is disposed would be reported in the statement of cash flows as an investing activity.

12.

Net cash provided by operating activities under the direct method is the difference between cash revenues and cash expenses. The direct method adjusts the accrualbased revenues and expenses directly to reflect the cash-based revenues and expenses, which combine to equal "net cash provided by operating activities."

13.

Depreciation and amortization expenses are not listed in the direct method operating activities section because they are not cash flow items—they do not affect cash. Recall the journal entry to record depreciation: debit Depreciation Expense and credit Accumulated Depreciation. The entry to record amortization is similar. As you can see, there is no cash involved in this journal entry. This is different from the indirect method, which uses profit as its starting point and must add back depreciation and amortization as noncash items included in the determination of profit.

Solutions Manual 13-6 Chapter 13 Copyright © 2014 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is strictly prohibited.

Kimmel, Weygandt, Kieso, Trenholm, Irvine

Financial Accounting, Sixth Canadian Edition

Answers to Questions (Continued) 14.

When a business invests money, it does so outside of its main revenue-generating operations. It might have excess cash, which it wants to put to use in producing some interest or dividend revenue. Since the intention is to earn a return on its investment, the buying and selling of investments is generally reported as investing activities in the statement of cash flows. The exception occurs when the investments are held for trading purposes, in which case they are treated similar to inventory acquired for resale. These types of investments are reported as operating activities.

15.

The gain on disposal of equipment and the loss on the sale of land would not appear on the statement of cash flows prepared using the direct method because these are not cash flow items. However, the gross proceeds received when the assets are sold would be reported in the statement of cash flows as investing activities.

16.

Short-term loans payable issued for trade purposes (e.g., instead of an accounts payable) are classified as operating activities. However, short-term loans payable that are issued for borrowing purposes rather than for trade do not relate to operating activities. The issue or repayment of such short-term loans payable are consequently classified as financing activities.

17.

A growing company would report low or negative cash flows from operating activities if it just commenced its operations. Later, as its sales grow, the cash from operating activities will become positive. The company would also usually show cash used in investing activities as it invests in its productive capacity. At this stage, the company will also usually show cash inflows in financing activities to finance the purchase of productive assets and to cover the shortfall from operating activities.

18.

The statement of cash flows is prepared from detailed information about the changes in account balances that occurred between two periods of time, as shown on the other financial statements. Unlike the other financial statements, it is not prepared from an adjusted trial balance. In particular, the information to prepare the statement of cash flows comes from a comparative statement of financial position, the income statement, the statement of changes in equity, and additional information.

19.

(a) The cash current debt coverage ratio is a cash-based ratio that measures liquidity. Liquidity can also be measured using the current ratio (accrual-based). (b) Solvency can be measured by the cash total debt coverage ratio (cash-based). Solvency can also be measured using the debt to total assets ratio (accrualbased). Free cash flow is also a cash-based solvency measure, but there is not accrual-based counterpart to this measure.

Solutions Manual 13-7 Chapter 13 Copyright © 2014 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is strictly prohibited.

Kimmel, Weygandt, Kieso, Trenholm, Irvine

Financial Accounting, Sixth Canadian Edition

Answers to Questions (Continued) 20.

Leon’s cash current debt coverage was probably lower than its current ratio because its net cash flows provided by operating activities was significantly lower than its current assets and/or because the company’s average current liabilities for the year were higher than its current liabilities on the statement of financial position date. Cash flows from operating activities could have been lower than current assets because of receivables, inventory, or prepaids which are included in current assets but do not increase cash.

21.

It is difficult to draw conclusions about the relative solvency of these companies, given the limited information provided. For instance, one would want to know the composition of the cash provided by operating activities and the debt of each of the companies. In addition to this, the times interest earned ratio for each company would prove helpful. Based on the information provided, Rogers reports a higher debt to total assets ratio than Shaw, which indicates a worse solvency. However, Rogers also shows a higher debt coverage ratio than Shaw and this ratio indicates a better solvency as Rogers seems more able to pay its interest. Consequently, Rogers would be considered more solvent.

22.

Creditors may be concerned about the company’s ability to repay its obligations over the long-term. The company’s declining cash total debt coverage ratio indicates either a decline in cash from operating activities, an increasing dependence on borrowed funds, or both. Creditors may be reluctant to grant loans to the company if these trends persist. The lack of cash flows from operating activities may be of concern to investors for several reasons. First, the decrease in cash flows may have an adverse effect on the company’s share price. In addition, some investors may be concerned that the company will not generate enough cash to pay dividends in the future. This concern is supported by the declining free cash flow, which also indicates the company is generating less cash from operating activities to pay future dividends and to expand the business.

23. If net capital expenditures and dividends paid exceed cash provided by operating activities, then free cash flow will be negative.

Solutions Manual 13-8 Chapter 13 Copyright © 2014 John Wiley & Sons Canada, Ltd. Unauthorized ...