A414 Ch 6

Given the following information for a company, its CFO is closest to: • Net income = $1,000 • Decrease in interest payable = $85 • Gain on sale of equipment = $45 • Increase in accounts payable = $90 • Decrease in inventory = $35 • Increase in prepaid assets = $105 • Depreciation = $85 • Increase in taxes payable = $125

$1,100 CFO = 1,000 - 85 - 45 + 90 + 35 - 105 + 85 +125 = $1,100

Use the date below to answer the following question: • Net income = $1,120,000 • Depreciation expense for the year = $27,000 • Decrease in inventory = $13,800 • Increase in taxes payable = $1,500 • Issuance of common stock = $60,000 • Dividends paid = $32,300 • Purchase of land = $28,300 • Investment in associate = $58,000 • Purchase of held‐for‐trading securities = $7,200 • Sale of available‐for‐sale securities = $84,700 Assume the company uses U.S. GAAP to prepare its financial statements. The company's cash flow from operations is closest to:

$1,155,100 CFO = Net income + Depreciation + Decrease in inventory + Increase in taxes payable - Purchase of held‐for‐trading securities CFO = 1,120,000 + 27,000 + 13,800 + 1,500 - 7,200 = $1,155,100

Solitaire Inc. prepares its financial statements according to U.S. GAAP. During 2009, the company earned net income amounting to $102 million. During the year, it purchased machinery worth $22 million and recognized a total depreciation expense of $2.4 million. The company also paid an annual dividend amounting to $1.5 million. Based on this information, the company's cash flow from operations is closest to:

$104.4 million. CFO = Net income + Depreciation expense. CFO = 102 + 2.4 = $104.4 million

A company has a net income of $150, an increase in accounts receivable of $30, depreciation of $55, and a decrease in accounts payable of $25. Its operating cash flow is closest to:

$150 Operating cash flow = 150 - 30 + 55 - 25 = $150.

Use the date below to answer the following question: • Net income = $1,120,000 • Depreciation expense for the year = $27,000 • Decrease in inventory = $13,800 • Increase in taxes payable = $1,500 • Issuance of common stock = $60,000 • Dividends paid = $32,300 • Purchase of land = $28,300 • Investment in associate = $58,000 • Purchase of held‐for‐trading securities = $7,200 • Sale of available‐for‐sale securities = $84,700 Assume the company uses U.S. GAAP to prepare its financial statements. The company's cash flow from financing activities is closest to:

$27,700 CFF = Issuance of common stock - Dividends paid. CFF = 60,000 - 32,300 = $27,700

Tiara Corporation reported net income of $8 million for the year 2009. Total revenue and cost of goods sold for the period amounted to $35 million and $20 million respectively. If accounts receivable is increased by $5 million during the period, cash received from customers during the period was closest to:

$30 million. Cash received from customers = Revenue - Increase in accounts receivable. Cash received from customers = 35 - 5 = $30 million

Magma Industries Ltd. reported net profit of $104 million for 2009 with revenues of $500 million and COGS of $270 million. During the period, Magma made purchases worth $40 million. If the company's accounts payable increased by $4 million, cash paid to the company's suppliers was closest to:

$36 million. Cash paid to suppliers = Purchases - Increase in accounts payable. Cash paid to suppliers = 40 - 4 = $36 million

A company reported the following information: • Cash received from customers = $27,300 • Cash paid to suppliers = $11,400 • Cash paid for other operating expenses = $7,400 • Cash paid for income taxes = $3,250 The company's cash flow from operating activities is closest to?

$5,250 Cash flow from operating activities = Cash received from customers - Cash paid to suppliers - Cash paid for other operating expenses - Cash paid for taxes. Therefore, CFO = 27,300 - 11,400 - 7,400 - 3,250 = $5,250

The following information relates to XYZ Company for 2009: • Net income = $2,050 • Depreciation = $345 • Interest expense = $150 • Tax rate = 30% • Net capital expenditure = $1,500 • Net debt repayment = $20 • Working capital investment = $325 • Net borrowing = $1,500 XYZ's free cash flow to the firm for 2009 is closest to:

$675 FCFF = 2,050 + 345 + (150 (1 − 0.3)) - 1,500 - 325 = $675

In conducting a common-size analysis for the below Statement of Cash Flows, total inflows for Firm A exceed inflows of Firm B by: Firm A Firm B Cash flow from operating activities Cash provided (used) by operations 24,525 177,387 Cash flow from investing activities Purchase of plant, property and equipment (94,176) (93,136) Other investment activity 14,408 (34,771) Cash provided (used) by investing (79,768) (127,907) Cash flow from financing activities Purchase Treasury Stock (45,854) (39,267) Dividends paid (49,290) (22,523) Short term borrowings 125,248 45,067 Long term borrowings 135,249 (245,954) Cash provided (used) by financing 165,353 (262,677) Change in cash 110,110 (213,197)

$72,366

Use the date below to answer the following question: • Revenue = $85 million • Cost of goods sold = $44 million • Decrease in inventory = $7 million • Increase in accounts payable = $4 million • Decrease in accounts receivable = $5 millions Cash received from customers is closest to:

$90 million. Cash received from customers = Revenue + Decrease in accounts receivable. Cash received by the company = 85 + 5 = $90 million

Use the date below to answer the following question: • Net income = $880,000 • Cost of goods sold = $600,000 • Depreciation expense = $49,000 • Interest expense = $27,000 • Investment in fixed assets = $32,000 • Investment in working capital = $13,000 • Funds borrowed = $16,000 • Debt repaid = $10,000 • Marginal tax rate = 40% Free cash flow to the firm is closest to:

$900,200 FCFF = NI + NCC + [Int (1 - tax rate)] - FCInv - WCInv. FCFF = 880,000 + 49,000 + [27,000 (1 - 0.4)] - 32,000 - 13,000 = $900,200

Which of the following is least likely classified as a financing activity under U.S. GAAP?

A bank receiving interest payments on a loan Under U.S. GAAP, interest paid and interest received are both classified as operating activities for all companies.

Which of the following is least likely an investing activity under IFRS?

A manufacturing firm investing in held‐for‐trading securities Under IFRS: Investment in securities classified as held‐for‐trading is represented as an operating activity. Receipt of interest on a loan may either be classified as an operating or an investing activity. Investment in property, plant, and equipment is classified as an investing activity.

Aquamarine Inc. is a manufacturer of perfumes and has several retail outlets throughout Europe. The company uses IFRS to report its financial statements and it recently entered into the following transactions: •Transaction 1: Borrowed money from a bank for the purchase of inventory worth $180,000. •Transaction 2: Made sales amounting to $990,000, of which $38,000 were made on credit. •Transaction 3: Invested excess cash amounting to $12,000 in securities classified as held for trading and $8,000 in securities classified as held to maturity. •Transaction 4: Paid dividends amounting to $130,000. Which of the following is the least likely effect on Aquamarine's financial statements due to Transaction 2?

An increase in cash flow from operating activities of $990,000. The company made cash sales of $952,000 (990,000 - 38,000). Sales made on credit will increase the company's receivables by $38,000.

Which of the following is most likely a use of cash for a company?

An increase in inventory An increase in inventory (asset) is a use of cash.

Which of the following is most likely a source of cash for a company?

An increase in wages payable An increase in wages payable (liability) is a source of cash.

After conducting a common-size analysis for the below Statement of Cash Flows, which of the following statements is least likely to be true? Firm A Firm B Cash flow from operating activities Cash provided (used) by operations 24,525 177,387 Cash flow from investing activities Purchase of plant, property and equipment (94,176) (93,136) Other investment activity 14,408 (34,771) Cash provided (used) by investing (79,768) (127,907) Cash flow from financing activities Purchase Treasury Stock (45,854) (39,267) Dividends paid (49,290) (22,523) Short term borrowings 125,248 45,067 Long term borrowings 135,249 (245,954) Cash provided (used) by financing 165,353 (262,677) Change in cash 110,110 (213,197)

Both firms' dividend policy is concerning given its CFO

Proceeds from sale of securities held for trading are classified as:

CFF Proceeds from sale of securities held for trading are classified as CFO.

Under IFRS, interest paid may be classified as:

CFO or CFF. Under IFRS, interest paid may be classified as CFO or CFF.

Under IFRS, dividends received may be classified as:

CFO or CFI. Under IFRS, dividends received may be classified as CFO or CFI.

After conducting a common-size analysis for the below Statement of Cash Flows, which of the following statements is least likely to be true? Firm A Firm B Cash flow from operating activities Cash provided (used) by operations 24,525 177,387 Cash flow from investing activities Purchase of plant, property and equipment (94,176) (93,136) Other investment activity 14,408 (34,771) Cash provided (used) by investing (79,768) (127,907) Cash flow from financing activities Purchase Treasury Stock (45,854) (39,267) Dividends paid (49,290) (22,523) Short term borrowings 125,248 45,067 Long term borrowings 135,249 (245,954) Cash provided (used) by financing 165,353 (262,677) Change in cash 110,110 (213,197)

Firm A is using a larger percentage of its cash to invest in Property Plant & Equipment

Sparta Inc. is a manufacturer of heavy machinery, but frequently invests in securities that it classifies as held to maturity. The outflow of cash for these investments is most likely classified as a(n):

Investing activity. Investments in securities classified as held to maturity are represented as an investing activity.

Gamma Corporation is involved in the manufacture of parts for the aerospace industry. Assuming U.S. GAAP applies, which of the following is least likely classified as an investing activity by the firm?

Investing in securities classified as held for trading Under U.S. GAAP, investing in securities classified as held for trading is classified as an operating activity.

Aquamarine Inc. is a manufacturer of perfumes and has several retail outlets throughout Europe. The company uses IFRS to report its financial statements and it recently entered into the following transactions: •Transaction 1: Borrowed money from a bank for the purchase of inventory worth $180,000. •Transaction 2: Made sales amounting to $990,000, of which $38,000 were made on credit. •Transaction 3: Invested excess cash amounting to $12,000 in securities classified as held for trading and $8,000 in securities classified as held to maturity. •Transaction 4: Paid dividends amounting to $130,000. Which of the following statements is most accurate regarding Transaction 3?

It will decrease cash flow from operating activities by $12,000. Investments in held‐for‐trading securities are classified as an operating activity, while investments in held‐to‐maturity securities are classified as an investing activity.

Capital One Bank provided $2.5 million to Pharma One Pvt. Ltd. (a pharmaceutical company) as a loan to be repaid in 5 years. Which of the following is the most accurate classification of this transaction by both the parties? Capital One Pharma One I Financing activity Financing activity I Financing activity Investing activity III Operating activity Financing activity

Row III Lending is a normal business activity for a bank and is therefore classified as an operating activity. Pharma One classifies the loan as a financing activity.

Howard Inc. (a manufacturing concern) uses U.S. GAAP to report its financial statement. Which of the following is most likely to be classified as an investing activity by this firm?

Sale of securities classified as available for sale. Sale of securities classified as available‐for‐sale is represented as an investing activity. Dividends received and interest paid are both operating activities under U.S. GAAP.

Use the date below to answer the following question: • Net income = $1,120,000 • Depreciation expense for the year = $27,000 • Decrease in inventory = $13,800 • Increase in taxes payable = $1,500 • Issuance of common stock = $60,000 • Dividends paid = $32,300 • Purchase of land = $28,300 • Investment in associate = $58,000 • Purchase of held‐for‐trading securities = $7,200 • Sale of available‐for‐sale securities = $84,700 Assume the company uses U.S. GAAP to prepare its financial statements. The company's cash flow from investing activities is closest to:

−$1,600 CFI = Sale of available‐for‐sale securities - Purchase of land - Investment in associate CFI = 84,700 - 28,300 - 58,000 = −$1,600

Beta Inc. is an exporter of refined sugar. During 2009, it earned net income of $104,000, purchased inventory worth $13,000 and invested in new machinery worth $28,000. The company had previously invested in available‐for‐sale securities which were sold during the year for $8,000. The company's cash flow from investing activities is closest to:

−$20,000

Using the following information and assuming that U.S. GAAP applies, the company's CFI is closest to: • Proceeds from sale of equipment = $32,000 • Loss on equipment sale = $9,000 • Dividends paid = $12,500 • Purchase of office premises = $100,000 • Common stock repurchases = $45,000 • Dividends received = $8,500 • Interest received = $1,200 • Supplier accounts paid = $3,700 • Cash collections from customers = $14,200 • Ending cash balance = $98,000

−$68,000 CFI = 32,000 - 100,000 = −$68,000