Cases 11 Anth Medi

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Chapter 11 The Statement of Cash Flows

CHAPTER 11Updated from the Twelfth Edition. Great Valu Variety Stores has been

dropped.

Approach

This is a topic that has always been dicult for students. The indirectmethod of developing the amount of cash ow from operating activities is

particularly dicult. The hearings prior to FASB 95indicated that theinvestment analyst community would press companies to continue using theindirect reconciliation! method" the primary supporters of the direct methodwere ban#ers. Thus$ it appears that students will not be well served in this

sub%ect area unless they gain an understanding of the indirect method.

Since students were introduced to the di&erence between cash ows andaccrual accounting's revenues and e(penses way bac# in )hapter *$ thisshould be reinforcement at this point$ but it usually seems to be a new

revelation to at least a subset of the class. +or those who never succeed infully understanding the rationale for the ad%ustments$ ,llustration --/ now

gives them a rote approach to which they can revert.

Cases

Medieval Adventures Companyis an armchair case intended to dramati0ethe di&erence between operating cash ow and income.

Amerbran Company (A)illustrates preparation of the cash ow statementfrom the other two statements and supplemental information.

Problems

Problem 11-1

12-2 sales 34$**5$222

6ess7 )hange in accounts receivable -*2$222!)ash generated from sales during 122* 34$125$22

2

Problem 11-2

a. Use of 31 million cash to purchase e8uipment is an investment use ofcash.

b. )ash proceeds from the issuance of common stoc# is a 9nancing source ofcash. The use of cash to retire mortgage bonds is a 9nancing use of cash.

c. :o cash e&ect.

d. :o cash e&ect.

e. )ash proceeds from the sale of machinery is an investment source ofcash.

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The above responses assume the direct method is used to present itscash ow of statement.

11-2


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Problem 11-3Kidsn Caboodle

Statement of Cash lo!s

)ash received from customers 3-;;$222)ash used in operations -/


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:et cash used in investingactivities

*/;!

+inancing ?ctivitiesBayment of debt *$/;2!

:et cash used in 9nancingactivities

*$/;2!

,ncrease in cash *$/;2Aeginning cash *$/;2

Ending cash 3


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the basic phenomenon that this case develops. The graph included hereincan be used in class to help illustrate this phenomenon.

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#uestion $

The re8uired monthly statements are shown on the following pages. Thepea# need comes by the end of Culy$ when a 3/2$222 loan would be neededto maintain a 0ero cash balance. ,n ?ugust$ cash generated by operations9nally turns positive$ enabling partial repayments of the loan. @ctober's315$;22 cash generated by operations enables ma#ing the 9nal 3-;$222

loan repayment and ending the month with a 3-1$;22 cash balance.

#uestion %

This 8uestion is the #ey one in terms of student insight from this case. Thecompany has been paying its costs currently$ but allowing customers two

months to pay. This$ coupled with constant growth$ causes large netoperating outows for several months$ which collectively eat up the 9rm's

initial capital. ,t is important for students to understand why it is that thissituation eventually turns around7 the unit margin is 312 and the monthlynonproduction costs are 9(ed at 3-2$222" thus$ the continued unit salesgrowth eventually in ?ugust! causes the current inows from sales twomonths ago! to e(ceed the current outows production costs for ne(t

month's sales plus 3-2$222!. ,n other words$ as the income statement shows$the 9rm is pro9table$ and eventually those pro9ts get reali0ed in cash.

This need could have been avoided by pro%ecting the cash ow 9gures thatthe students have developed after the fact. Then the company could have

arranged the necessary line of credit. Aan#s are happy to provide such funds

for companies that anticipate the need because that anticipation reectsgood 9nancial management. @n the other hand$ ban#s are hesitant to lend toa 9rm that has been ta#en by surprise by a cash shortage. @f course$ a nocost method to avoid the problem was also probably feasible. The companycould have arranged credit with vendors to help 9nance the inventory$ andcould have been more aggressive in collecting from its customers in accordwith the stated *2day terms. ,f the company delayed its payments by *2

days and accelerated receivable collections from


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&arch &a' ()l':et income 3*2$222 3;2$222 352$222

,ncrease in accounts receivable ;;$222!

;;$222!

;;$222!

,ncrease in inventory -5$;22

!

-5$;22

!

-5$;22

!)ash from operations /1$;22!

11$;22!

1$;22!

Broceeds of debt 2 11$;22 1$;22)ash increase decrease! /1$;22

!2 2

Aeginning of month cash balance 51$;22 2 2End of month cash balance 3*2$222 3 2 3 2

*PERAT+$, ./,ET

(an0 eb0 &ar0 Apr0 &a' ()ne ()l' A)0 Sept0 *ct0Sales 3;;$22

2341$;2

23--2$2

223-*5$;

223-


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ban#Total 3-5*$5

;23-;1$;

223-15$;

223--;$2

223-*1$;

223-;2$2

223-


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22 22 22 22 22 22 22 22 22 22 22

*iabilities and "+uity:ote Bayable 3 3 3 3 3

1$;223

1;$2223

*5$;223

/2$2223

*1$;223

-;$2223

)ommon Stoc# 1;2$222

1;2$222

1;2$222

1;2$222

1;2$222

1;2$222

1;2$222

1;2$222

1;2$222

1;2$222

1;2$2

Ietained Earnings JJJJJJJ -2$222 *2$222


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Cases 11 Anth Medi

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