Prepare a complete cash flow statement using indirect method
Cost Accounting
For your Assignment, you will apply the fundamental concepts of accounting and finance that you are studying to complete several problems indicative to real-world business scenarios and challenges. For this Assignment, there will be two questions to answer. Both questions should be submitted together as one document.
Question1:
XYZ Ltd. is a group of doctors, dentists, professional sports players and celebrities with excess funds who wish to find small companies with great innovative ideas and invest in them. Several of the small companies present their idea to XYZ under a televised show broadcasted on national TV.
The following information has been derived from 3 years’ financial statements of ABC Ltd., one of the small companies looking for investment from XYZ.
Balance Sheets, December 31
2015 2014 2013
Current assets
Cash 50,000 45,000 94,000
Account receivable, net 130,000 120,000 110,000
Merchandise inventories 250,000 230,000 195,000
Other current assets 45,000 53,000 42,000
Total current assets 475,000 448,000 441,000
Property, plant & equipment, net 196,000 191,000 175,000
Total assets 671,000 639,000 616,000
Current liabilities
Accounts payable 175,000 195,000 185,000
Accrued liabilities 1,000 6,500 21,000
Total current liabilities 176,000 201,500 206,000
Long-term liabilities 230,000 250,000 295,000
Total liabilities 406,000 451,500 501,000
Shareholders’ equity
Common shares 110,000 95,000 65,000
Preferred shares, note 5 25,000 25,000 25,000
Retained earnings 130,000 67,500 25,000
Total shareholders’ equity 265,000 187,500 115,000
Total liabilities and shareholders’ equity 671,000 639,000 616,000
Income statements 2015 2014
Net sales £723,700 £694,000
Cost of goods sold 347,350 344,500
Gross margin 376,350 349,500
Operating expenses 183,500 179,750
Income from operations 192,850 169,750
Interest expense 37,525 39,450
Income before income tax 155,325 130,300
Income tax expense 38,831 32,575
Net income £116,494 £97,725
Additional information:
The common shares are traded on the stock exchange. At the end of 2015, the value of the share was £15.00, and at the end of 2014, the value per share was £14.00.
The number of shares outstanding on the market is as follows:
2015: 25,000
2014: 15,000
2013: 10,000
All sales are made on credit.
The company’s income tax rate is 25%.
The preferred shares are cumulative, no par value, £2.50, 10,000 shares authorised and 2,000 shares issued and outstanding.
To answer this question:
Assume that you, the consultant, have been hired by XYZ to assist in the analysis of the financial statements and provide a recommendation whether XYZ should invest or not invest in this company. Justify your recommendation based on the calculation of the following financial ratios:
Current ratio (liquidity)
Operating profit margin (profitability)
ROSF (profitability)
Average settlement period for trade receivables (efficiency)
Earnings per share (investment)
Question 2:
Bulls Corporation has a December 31 fiscal year end. The controller of the company is currently completing the financial statements of the company in order to present them at the next board meeting. He completed most of the work but did not get around to finishing the cash flow statement. He gives you the following financial information in order for you to help him with the preparation of the cash flows.
Balance Sheet 2015 2014
Cash £38,500 £8,000
Accounts receivable, net 20,000 29,500
Merchandise inventory 37,000 38,000
Prepaid insurance 9,500 15,000
Land 54,500 40,600
Equipment, at cost 104,500 90,700
Less: accumulated amortisation (30,500) (15,500)
Patent 49,000 53,200
Total assets £282,500 £259,500
Accounts payable £ 58,500 £ 42,000
Income taxes payable 16,500 11,500
Advertising payable 5,000 –
Dividends payable 40,000 10,000
Notes payable 40,000 83,000
Share capital 93,000 78,500
Retained earnings 29,500 34,500
Total liabilities and shareholders’ equity £282,500 £259,500
Sales £1,090,000
Cost of goods sold 672,000
Gross profit 418,000
Operating expense
Salaries expense 195,000
Advertising expense 35,000
Rent expense 67,500
Insurance expense 34,500
Amortisation expense 25,000
Total operating expenses 357,000
Income from operations 61,000
Interest expense 2,500
Gain on sale of equipment 7,500
Income before income taxes 66,000
Income tax expense 4,000
Net income £62,000
Additional information:
Bulls Corp. purchased equipment for £36,300 in cash during the year.
Bulls Corp. sold equipment for cash during the year.
No patent has been purchased nor sold in the year.
Accounts payable relates solely to transactions with suppliers for inventory.
To answer this question
Prepare a complete cash flow statement using the indirect method for the 2015 fiscal year.
Compute the following amounts:
Cash collected from clients during the year.
Cash paid for advertising expense.
Cash paid to suppliers for inventory.
