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Company cash flow evaluation B-16.12 Waguespack Corporation and Hedrick Corporation

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Waguespack Corporation and Hedrick Corporation had identical cash positions at the beginning and end of 20X9. Each company also reported a net income of $150,000 for 20X9. Evaluate their cash flow statements that follow. Which company is displaying elements of cash flow stress? What factors cause you to reach this conclusion? What is the importance of evaluating a company’s cash flow statement? Knowledge of cash flow statement components B-16.11 Company cash flow evaluation B-16.12 WAGUESPACK CORPORATION Statement of Cash Flows For the Year Ending December 31, 20X9 Cash flows from operating activities: Net income $150,000 Add (deduct) noncash effects on operating income Depreciation expense $ 20,000 Gain on sale of equipment (185,200) Increase in accounts receivable (45,000) Decrease in inventory 37,500 Increase in accounts payable 11,400 Decrease in income taxes payable (3,000) (164,300) Net cash provided by operating activities $ (14,300) Cash flows from investing activities: Sale of equipment 204,900 Cash flows from financing activities: Proceeds from long-term borrowing 20,000 Net increase in cash $210,600 Cash balance at January 1, 20X9 66,000 Cash balance at December 31, 20X9 $276,600 HEDRICK CORPORATION Statement of Cash Flows For the Year Ending December 31, 20X9 Cash flows from operating activities: Net income $150,000 Add (deduct) noncash effects on operating income Depreciation expense $160,000 Decrease in accounts receivable 43,700 Increase in inventory (87,500) Decrease in accounts payable (8,100) Decrease in income taxes payable (8,600) 99,500 Net cash provided by operating activities $249,500 Cash flows from investing activities: Purchase of equipment (20,400) Cash flows from financing activities: Repayment of long-term borrowing (18,500) Net increase in cash $210,600 Cash balance at January 1, 20X9 66,000 Cash balance at December 31, 20X9 $276,60

 
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Knowledge of cash flow statement components B-16.11

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Review the following technical comments about the presentation methodology for the statement of cash flows. Identify if the comment pertains to the “direct” or “indirect” approach, or “both.” The operating cash flows section typically begins with net income. Separate disclosure is provided for noncash investing/financing activities. Requires supplemental disclosure reconciling net income to operating cash flows. Conceptually, the preferred approach. Includes three separate sections – operating, investing, and financing. Requires supplemental disclosure of cash paid for interest and cash paid for taxes. A loss on the sale of a plant asset would be added back in operating cash flows.

 
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B-16.09 Rearranging cash flows in good form – direct approach

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Following is an incorrectly prepared statement of cash flows for Herman Corporation. Review and correct this presentation, using a direct approach. HERMAN CORPORATION Statement of Cash Flows For the Year Ending December 31, 20X2 Cash balance at January 1, 20X2: $ 175,000 Cash receipts during 20X2: Sale of building $ 800,000 Dividend received on investments 10,000 Cash received from customers 2,350,000 Proceeds from issuing stock 1,400,000 4,560,000 Cash payments during 20X2: Purchase of inventory $ 760,000 Interest on loans 56,000 Income taxes 124,000 Repayment of long-term note payable 2,000,000 Purchase of equipment 435,000 Selling and administrative expenses 696,000 Dividends on common 175,000 (4,246,000) Cash balance at December 31, 20X2 $ 489,000 Noncash investing/financing activities: Bought land by issuing promissory note payable $ 450,00

 
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B-16.01 Liquidity analysis Fairfield Corporation

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Fairfield Corporation owns three separate subsidiaries. The Board of Directors is developing a strategy to withdraw $1,000,000 in cash from one of the subsidiaries to finance the acquisition of a fourth business. Prepare the current and quick ratio for each subsidiary, and rank order the subsidiaries based on their ability to pay a dividend to the parent company without jeopardizing liquidity. Sub A Sub B Sub C Cash $1,000,000 $3,000,000 $ 5,000,000 Trading securities 3,000,000 2,000,000 1,000,000 Accounts receivable 6,000,000 5,000,000 14,000,000 Inventory 4,000,000 8,000,000 7,000,000 Prepaid rent 2,000,000 2,000,000 3,000,000 Accounts payable 5,000,000 2,000,000 8,000,000 Interest payable 1,000,000 1,000,000 6,000,000 Note payable (due in 6 months) 4,000,000 1,500,000 4,000,000 Unearned revenues 3,000,000 500,000 2,000,000

 
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