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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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P/E, PEG, Dividend rates B-15.07

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Calculate the price earnings ratio, PEG ratio, dividend rate, and dividend payout ratio for each of the following companies. Will each ratio consistently rank the companies from “best” to “worst” performer? Earnings Per Share Dividends Per Share Market Price Per Share Average Annual Increase in Earnings Andrews Corporation $2.50 $0.00 $25.00 5% Borger Corporation $1.00 $1.00 $18.00 10% Calvert Corporation $5.00 $2.50 $20.00 5%

 
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