Bad5shah

Impala Corporation reported the following financial information:

		2006	2007
Balance sheet values as of December 31:
	Prepaid insurance	$650,000	$475,000
	Interest payable	250,000	300,000
Cash flows for the year ended December 31:
	Insurance premiums paid	$845,000	$750,000
	Interest paid	900,000	900,000

Calculate Impala’s insurance expense and interest expense for the year ended December 31, 2007.

Insurance expense

Interest expense

A) $1,020,000 $950,000

B) $925,000 $950,000

C) $925,000 $850,000

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Cash paid for insurance = insurance expense + change in prepaid insurance, so insurance expense = cash paid for insurance – change in prepaid insurance. Insurance expense for 2007 is equal to $925,000 [($750,000 cash paid for insurance – (–$175,000)]. Interest expense for 2007 is equal to $950,000 ($900,000 cash interest paid + $50,000 increase in interest payable).

Bad5shah

What is the impact on accounts receivable if sales exceed cash collections and what is the impact on accounts payable if cash paid to suppliers exceeds purchases?

A) Only accounts receivable will increase.

B) Both accounts payable and accounts receivable will increase.

C) Only accounts payable will increase.

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If a firm sells more than it collects, accounts receivable will increase. If a firm pays suppliers more than it purchases, accounts payable will decrease.

Bad5shah

Pacific, Inc.’s financial information includes the following, with “change” referring to the difference from the prior year (in $ millions):

Net Income	27
Change in Accounts Receivable	+4
Change in Accounts Payable	+1
Change in Inventory	+5
Loss on sale of equipment	-8
Gain on sale of real estate	+4
Change in Retained Earnings	+21
Dividends declared and paid	+4

Pacific, Inc.’s cash flow from operations (CFO) in millions was:

A) $23.

B) $27.

C) $15.

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Using the indirect method, cash flow from operations is net income less increase in accounts receivable, plus increase in accounts payable, less increase in inventory, plus loss on sale of equipment, less gain on sale of real estate. 27 – 4 + 1 – 5 + 8 – 4 = $23 million.

Bad5shah

Eagle Company’s financial statements for the year ended December 31, 2005 were as follows (in $ millions):

Income Statement
Sales	150
Cost of Goods Sold	(48)
Wages Expense	(56)
Interest Expense	(12)
Depreciation	(22)
Gain on Sale of Equipment	6
Income Tax Expense	( 8)
Net Income	10

Balance Sheet
	12-31-04	12-31-05
Cash	32	52
Accounts Receivable	18	22
Inventory	46	44
Property, Plant & Equip. (net)	182	160
Total Assets	278	278
Accounts Payable	28	33
Long-term Debt	145	135
Common Stock	70	70
Retained Earnings	35	40
Total Liabilities & Equity	278	278

Cash flow from operations (CFO) for Eagle Company for the year ended December 31, 2005 was (in $ millions).

A) $29.

B) $41.

C) $37.

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Using the indirect method:

Add: Net Income	$10
Add: Depreciation Expense	22
Less: Gain from Sale of Equip.	(6)
Less: Increase in Accounts Receivable	(4)
Add: Decrease in Inventory	2
Add: Increase in Accounts Payable	5
Cash flow from operations (CFO)	29

Bad5shah

When calculating cash flow from operations (CFO) using the indirect method which of the following is most accurate?

A) The indirect method requires an additional schedule to reconcile net income to cash flow.

B) In using the indirect method, each item on the income statement is converted to its cash equivalent.

C) When recognizing a gain on the sale of fixed assets, the amount is a deduction to operating cash flows.

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When recognizing a gain on the sale of fixed assets, the amount is a deduction to operating cash flows. This is because the gain would be double counted in the investing section and in net income. Therefore, the gain must be removed from net income. The direct method of cash flow calculation converts the income statement items to their cash equivalents, not the indirect method. Also, depreciation is added to net income in order to calculate CFO using the indirect method.

Bad5shah

A company has the following changes in its balance sheet accounts:

Net Sales	$500
An increase in accounts receivable	20
A decrease in accounts payable	40
An increase in inventory	30
Sale of common stock	100
Repayment of debt	10
Depreciation	2
Net Income	100
Interest expense on debt	5

The company’s cash flow from financing is:

A) $100.

B) $90.

C) -$10.

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Sale of common stock	$100
Repayment of debt	(10)
Financing cash flows	$ 90

Bad5shah

Which of the following statements about accounting procedures and their impact on the statement of cash flows is least valid? All else equal:

A) A nonprofitable company that uses LIFO to account for inventory will have higher total cash flow than a nonprofitable company that uses FIFO during a period of rising prices.

B) Cash flow from financing (CFF) is higher over the life of a bond if a firm issues the bond at a premium, compared to issuing the bond at par.

C) A company that finances through common stock issues may have the same cash flow from financing (CFF) as a firm that issues debt.

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Because of the impact of income taxes, a profitable company that accounts for inventory using LIFO will have higher total cash flow than a profitable company that uses FIFO. The company that uses LIFO will have higher cost of goods sold, resulting in lower net income and thus lower taxes. The other statements are accurate:

• A company that issues common stock is not required to pay dividends (which would reduce cash flow from financing). Thus, it may have the same CFF as a firm that issues debt since interest paid on debt is a component of CFO.
• When a company issues bonds at a premium, the proceeds raised at issuance (CFF inflow) are greater than the par value repaid at maturity (CFF outflow). For bonds issued at par, the CFF inflow at issuance is equal to the CFF outflow at maturity.

Bad5shah

The net income for Miller Bat Company was $3 million for the year ended December 31, 2004. Additional information is as follows:

• Depreciation on fixed assets $1,500,000

• Gain from cash sales of land 200,000

• Increase in accounts payable 300,000

• Dividends paid on preferred stock 400,000

The net cash provided by operating activities in the statement of cash flows for the year ended December 31, 2004 is:

A) $4,800,000.

B) $4,600,000.

C) $4,200,000.

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$3,000,000 + $1,500,000 − $200,000 + $300,000 = $4,600,000.

Bad5shah

Galaxy, Inc.’s U.S. GAAP balance sheet as of December 31, 2004 included the following information (in $):

	12-31-03	12-31-04
Accounts Payable	300,000	500,000
Dividends Payable	200,000	300,000
Common Stock	1,000,000	1,000,000
Retained Earnings	700,000	1,000,000

Galaxy’s net income in 2004 was $800,000. What was Galaxy’s cash flow from financing (CFF) in 2004?

A) -$300,000.

B) -$500,000.

C) -$400,000.

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Dividends declared in 2004 are net income less the increase in retained earnings ($800,000 - $300,000 = $500,000). Dividends declared less the increase in dividends payable is dividends paid ($500,000 – ($300,000 - $200,000) = $400,000). This is a cash outflow so it is a negative number. Dividends paid are always cash flow from financing under U.S. GAAP. Note that accounts payable changes are included in cash flow from operations (CFO).

Bad5shah

Determine the cash flow from investing given the following table:

Item	Amount
Cash payment of dividends	$30
Sale of equipment	$25
Net income	$25
Purchase of land	$15
Increase in accounts payable	$20
Sale of preferred stock	$25
Increase in deferred taxes	$5

A) -$5.

B) -$10.

C) $10.

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Item		Amount
Cash payment of dividends	CFF	-$30
Sale of equipment	CFI	+$25
Net income	CFO	+$25
Purchase of land	CFI	-$15
Increase in accounts payable	CFO	+$20
Sale of preferred stock	CFF	+$25
Increase in deferred taxes	CFO	+$5

CFI = Sale of Equipment (+25) + Purchase of Land (–15) = $10.