honeycfa

Selected information from Rockway, Inc.’s U.S. GAAP financial statements for the year ended December 31, included the following (in $):

	2004	2005
Sales	17,000,000	21,000,000
Cost of Goods Sold	11,000,000	15,000,000
Interest Paid	800,000	1,000,000
Current Income Taxes Paid	700,000	1,000,000
Accounts Receivable	3,000,000	2,500,000
Inventory	2,400,000	3,000,000
Property, Plant & Equip.	2,000,000	16,000,000
Accounts Payable	1,000,000	1,400,000
Long-term Debt	8,000,000	9,000,000
Common Stock	4,000,000	5,000,000

Using the direct method, cash provided or used by operating activities(CFO) in the year 2005 was:

A) $6,300,000.

B) $5,300,000.

C) $4,300,000.

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Cash provided or used by operating activities under the direct method is computed by adding cash inflows and subtracting cash inputs and cash outflows. Operating Cash inflows for Rockway Inc. for 2005 came from sales ($21,000,000) and decrease in accounts receivable ($3,000,000 ? $2,500,000 = $500,000) for net cash inflows of ($21,000,000 + $500,000 =) $21,500,000. Operating cash inputs were cost of goods sold ($15,000,000), plus the increase in inventory ($3,000,000 ? $2,400,000 = $600,000) less the increase in accounts payable, (which is a source of funds) ($1,000,000 ? $1,400,000 = -$400,000) for net cash inputs of ($15,000,000 + $600,000 - $400,000 =) $15,200,000. Other operating cash outflows were interest paid ($1,000,000) and current income taxes paid ($1,000,000) totaling ($2,000,000). Cash provided by operations was ($21,500,000 ? $15,200,000 ? $2,000,000 =) $4,300,000. Changes in property, plant and equipment, long-term debt and common stock do not affect cash from operations.

honeycfa

An analyst has gathered the following information about a company:

Income Statement 2005
Sales				$650
Expenses
	COGS		$445
	Depreciation		10
	Selling, General & Admin.		112
	Interest		10
		Total expenses		577
Pre-tax income				$73
Taxes				29
Net income				$44

Balance Sheet
Assets	2004	2005		Liabilities	2004	2005
Cash	50	35		Accts. Payable	115	90
Accts. Rec.	120	140		Wages Payable	55	50
Inventories	75	70		Bonds	100	90
Fixed Assets	215	190		Common Stock	50	20
Accum. Depr.	(95)	(105)		Retained Earnings	45	80
Total	365	330			365	330

Note: the dividend payout ratio equals 20%.

What is the net increase or decrease in cash?

A) +$15.

B) -$15.

C) +$43.

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There are two ways to approach this problem. The easier way is to just take the difference in cash from the two years: $35 ? $50 = -$15.

The harder way is to create a statement of cash flows:

CFO = Net Income (44) + (Depreciation) (10) – (increase in Accounts Receivable) (20) + (decrease in Inventory) (5) – (decrease in Accounts Payable) (25) – (decrease in Wages Payable) (5) = $9.

CFI = $25 (fixed assets decreased by $25 representing a source of cash)

CFF = Dividends paid ((0.20) × (44)) = -9 – (decrease in bonds) (10) ? (decrease in common stock) (30) = -$49.

The net change in cash = 9 + 25 – 49 = -$15, or a decrease of $15.

honeycfa

An analyst has gathered the following information about a company:

Income Statement 2005
Sales				$908
Expenses
	COGS		$512
	Depreciation		6
	Selling, General & Admin.		129
	Interest		53
		Total expenses		700
Pre-tax income				208
Taxes				83
Net income				$125

Balance Sheet
Assets	2004	2005		Liabilities	2004	2005
Cash	60	80		Accts. Payable	100	75
Accts. Rec.	140	155		Wages payable	80	85
Inventories	47	72		Bonds	65	80
Fixed Assets	120	160		Common Stock	40	70
Accum. Depr.	(29)	(35)		Retained Earnings	53	122
Total	338	432			338	432

Note: the dividend payout ratio equals 45%.

What is the net increase or decrease in cash?

A) +$20.

B) +$15.

C) -$15.

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There are two ways to approach this problem. The easy way is to just take the difference in cash between the two years: 80 – 60 = $20

The other way is to create a statement of cash flows:

CFO = Net Income (125) – (increase in Accounts Receivable) (15) – (increase in Inventory) (25) + (Depreciation) (6) – (decrease in Accounts Payable) (25) + (increase in Wages Payable) (5) = $71.

CFI = Fixed assets increased by $40 representing a use of cash = -$40.

CFF = (issuance of Bonds) (15) + (issuance/sale of Common Stock) (30) – Dividends (56) = -$11

Net increase in cash = 71 – 40 –11 = $20.

honeycfa

Which of the following statements about the indirect method of calculating the statement of cash flows is FALSE?

A) No adjustment is needed to account for extraordinary items because they are found above net income and are thus already accounted for.

B) No adjustment is needed to account for changes in accounts receivable since no cash was involved.

C) An adjustment is needed for the payment of deferred taxes.

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Extraordinary items are reported below income from continuing operations but above net income. You must adjust for changes in the working capital accounts: accounts receivable, inventory, and accounts payable.

honeycfa

Which of the following is TRUE about the consideration of depreciation in the operations section of a cash flow statement?

    Direct Method                               Indirect Method

A) Does not consider                      Considers

B) Does not consider                      Does not consider

C) Considers                                  Considers

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The indirect method must add back depreciation expense because the starting point is net income. Since the direct method does not begin with net income it does not need to consider non-cash expenses such as depreciation.

honeycfa

An analyst has gathered the following information about a company:

Income Statement for the Year 2004
Sales							$1,500
Expenses
	COGS					$1,300
	Depreciation					30
	Int. Expenses					40
					Total expenses		1,370
Income from cont. op.							130
				Gain on sale			30
Income before tax							160
Income tax							64
Net Income							$96

Additional Information:
Dividends paid	$30
Common stock sold	20
Equipment purchased	50
Bonds issued	80
Fixed asset sold for (original cost of $100 with accumulated depreciation of $70)	60
Accounts receivable decreased by	30
Inventory decreased by	20
Accounts payable increased by	20
Wages payable decreased by	10

What is the cash flow from operations?

A) $170.

B) $156.

C) $135.

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Net Income		+$96
Depreciation		+30
Gain on sale of asset		-30
Accts. Rec.		+30
Inventory		+20
Accts. Payable		+20
Wage/Pay		-10
	CFO	+$156

honeycfa

The Beeline Company has the following balance sheet and income statement.

Beeline Company Balance Sheet
As of December 31, 2004
	2003	2004			2003	2004
Cash	$50	$60		Accounts payable	$100	$150
Accounts receivable	100	110		Long-term debt	400	300
Inventory	200	180		Common stock	50	50
				Retained earnings	400	500
Fixed assets (gross)	800	900		Total liabilities and equity	$950	$1,000
Less: Accumulated depreciation	200	250
Fixed assets (net)	600	650
Total assets	$950	$1,000

Beeline Company Income Statement
For year ended December 31, 2004
Sales	$1,000
Less:
COGS	600
Depreciation	50
Selling, general, and administrative expenses	160
Interest expense	23
Income before taxes	$167
Less tax	67
Net income	$100

The cash flow from operations for 2004 is:

A) $260.

B) $210.

C) $150.

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Cash flow from operations (CFO) calculated using the indirect method is: net income (100) + depreciation (50) – increase in accounts receivable (10) + decrease in inventory (20) + increase in accounts payable (50) = $210.

honeycfa

John Stone, CFA, is an investment advisor specializing in the preparation of company and industry reports for high net worth customers at Learmon Brothers. Currently, Stone is preparing a report on Soft Corporation, a rapidly growing software company. The explosive growth of this company was financed primarily by an initial public offering in which 3,000,000 shares were issued at a price of $20 per share on June 27, 2004. Soft Corporation received additional capital when employee stock options for 1,000,000 shares at a price of $10 were exercised on January 1, 2005. Stone realizes the importance of cash flow on a company's financial health and would like to include a projected statement of cash flows for 2005. Soft Corporation financial statements are presented in Tables 1 and 2. Included are the projected statements for the year ending December 31, 2005.

Table 1 Soft Corporation Balance Sheets as of December 31(in millions)
		Actual 2004	Projected 2005
Cash		$24.0	$26.0
Accounts Receivable		17.0	24.0
Inventory		100.0	150.0
PP&E		100.0	125.0
Accumulated depreciation		(30.0)	(35.0)
	Total Assets	$211.0	$290.0
Accounts payable		$91.0	$101.0
Long-term debt		20.0	40.0
Common stock		80.0	90.0
Retained earnings		20.0	59.0
	Total liabilities and equity	$211.0	$290.0

Table 2 Soft Corporation Income Statement for Years Ended December 31 (in millions except per share data)
		Actual 2004	Projected 2005
Sales		$80.0	$198.0
COGS		(38.0)	(90.0)
	Gross profit	$42.0	$108.0
SG&A		(13.0)	(30.0)
Depreciation		(3.0)	(5.0)
	Operating expenses	$(16.0)	$(35.0)
Interest expense		$(4.0)	$(5.0)
Pretax Income		22.0	68.0
Income tax expense		(7.0)	(25.0)
Net income		$15.0	$43.0
EPS		$2.0	$4.3
Average shares outstanding (millions)		7.5	10.0
Dividends per share		$0.1	$0.4

Stone decides to use the direct method to compute Soft Corporation's projected operating cash collections. Using this method, which of the following is Soft Corporation's projected operating cash collections for the year ending December 31, 2005 (in millions)?

A) 191.0.

B) 198.0.

C) 1.0.

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Under the direct method, cash collections are found by subtracting the change in accounts receivable from total sales. This is done because an increase in receivables indicates sales that were made on credit. In the case of Soft Corporation, the calculation is as follows:

198.0 – (24.0 – 17.0) = 191.0

Therefore, the correct answer is 191.0. Financing activities and expenses are not included in cash collections from operating activities.

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Stone decides to use the direct method to compute Soft Corporation's projected cash inputs. Under this method, what will Soft Corporation's projected cash outflow inputs into the manufacturing process be for the year ending December 31, 2005 (in millions)?

A) -130.0.

B) +90.0.

C) -80.0.

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Under the direct method cash inputs = -COGS + decrease in inventory + increase in accounts payable. The calculation for Soft Corporation’s projected cash inputs is as follows:

-90.0 ? (150.0 ? 100.0) + (101.0 ? 91.0) = -130.0

honeycfa

John Stone, CFA, is an investment advisor specializing in the preparation of company and industry reports for high net worth customers at Learmon Brothers. Currently, Stone is preparing a report on Soft Corporation, a rapidly growing software company. The explosive growth of this company was financed primarily by an initial public offering in which 3,000,000 shares were issued at a price of $20 per share on June 27, 2004. Soft Corporation received additional capital when employee stock options for 1,000,000 shares at a price of $10 were exercised on January 1, 2005. Stone realizes the importance of cash flow on a company's financial health and would like to include a projected statement of cash flows for 2005. Soft Corporation financial statements are presented in Tables 1 and 2. Included are the projected statements for the year ending December 31, 2005.

Table 1
Soft Corporation Balance Sheets
as of December 31
(in millions)
		Actual 2004	Projected 2005
Cash		$24.0	$26.0
Accounts Receivable		17.0	24.0
Inventory		100.0	150.0
PP&E		100.0	125.0
Accumulated depreciation		(30.0)	(35.0)
	Total Assets	$211.0	$290.0
Accounts payable		$91.0	$101.0
Long-term debt		20.0	40.0
Common stock		80.0	90.0
Retained earnings		20.0	59.0
	Total liabilities and equity	$211.0	$290.0

Table 2
Soft Corporation Income Statement
for Years Ended December 31
(in millions except per share data)
		Actual 2004	Projected 2005
Sales		$80.0	$198.0
COGS		(38.0)	(90.0)
	Gross profit	$42.0	$108.0
SG&A		(13.0)	(30.0)
Depreciation		(3.0)	(5.0)
	Operating expenses	$(16.0)	$(35.0)
Interest expense		$(4.0)	$(5.0)
Pretax Income		22.0	68.0
Income tax expense		(7.0)	(25.0)
Net income		$15.0	$43.0
EPS		$2.0	$4.3
Average shares outstanding (millions)		7.5	10.0
Dividends per share		$0.1	$0.4

Stone decides to use the direct method to compute Soft Corporation's projected net cash flow from financing activities. Under this method, what will Stone report Soft Corporation's projected net cash flow from financing activities to be for 2005 (in millions)?

A) 26.0.

B) 36.0.

C) 30.0.

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There are three components that Stone will need to calculate Soft Corporation's projected net cash flow from financing activities, issuance of long-term debt, issuance of common stock, and payment of cash dividends. The calculation will be the same under both the direct and indirect methods and is as follows:

(40.0 – 20.0) + (10.0) – (4.0) = 26.0

The issuance of common stock is from the exercise of the employee stock options. The correct choice is 26.0.

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Under the direct method, what will Stone find Soft Corporation's projected net change in cash to be for the year ending December 31, 2005?

A) $9,000,000.

B) $4,000,000.

C) $2,000,000.

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Soft Corporation's net cash flow from operations are $1.0 million, they spent $(25.0) million on PP&E, and received $26.0 million from financing activities. This makes the net change in cash $2,000,000. Note that projected cash for 2005 is 2.0 million greater than at year-end 2004.

honeycfa

An analyst has gathered the following information about a company:

Income Statement for the Year 2005
Sales							$1,500
Expenses
	COGS					$1,300
	Depreciation					20
	Goodwill					10
	Int. Expenses					40
					Total expenses		1,370
Income from cont. op.							130
				Gain on sale			30
Income before tax							160
Income tax							64
Net Income							$96

Additional Information:
Dividends paid	30
Common stock sold	20
Equipment purchased	50
Bonds issued	80
Fixed asset sold for (original cost of $100 with accumulated depreciation of $70)	60
Accounts receivable decreased by	30
Inventory decreased by	20
Accounts payable increased by	20
Wages payable decreased by	10

What is the cash flow from investing?

A) $130.

B) $10.

C) $20.

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Purchase of equipment		-$50
Fixed asset sold		$60
	CFI	$10