Financial and Managerial Accounting for MBAs 6th Edition Easton Solutions Manual | Complete Study Guide .

Financial and Managerial Accounting for MBAs 6th Edition Easton Solutions Manual | Complete Study Guide . Depreciation is added back to undo the effect it had on the income statement. Stryker deducted $306 million of depreciation expense in computing net income. Depreciation is a noncash expense so Stryker did not actually use $306 million of cash to pay depreciation expense. Thus, to determine how much cash was generated, net income is too low by the depreciation amount of $306 million. The depreciation add-back is NOT a source of cash as some mistakenly believe. Cash is, ultimately, generated by profitable operations, not by depreciation. b. Revenue is recognized, and profit increased, when it is earned, whether or not cash is received. Sales on account, therefore, increase profit, and the deduction for the increase in receivables reflects the fact that cash has not yet been received. The negative sign on the adjustment for the increase in inventories reflects the outflow of cash when inventories are purchased. Inventories are typically purchased on account. As a result, payment is not made when the inventories are purchased. The positive sign on the increase in accounts payable offsets a portion of the negative sign on the inventory increase, and the net amount represents the net cash paid for the increase in inventories. Accounts payable are typically non-interest bearing, thus providing a cheap and important source of cash. Accrued liabilities relate to expenses that have been recognized in the income statement that have not yet been paid. An increase in accrued liabilities means that cash paid out for expenses during the year was less than the expenses recognized in the income statement. Therefore, an increase in accrued expenses is shown as a positive adjustment to net income . ©Cambridge Business Publishers, 2021 11-22 Financial Accounting for MBAs, 8 th Edition c. Companies must continue to invest in their infrastructure, both for new additions and replacement, to remain competitive. Depreciation expense represents the using up of depreciable assets. In general, we should expect capital expenditures (CAPEX) to exceed depreciation expense. This indicates that the company is growing its infrastructure as well as replacing the portion that is wearing out. This is the case for Stryker in fiscal 2018, depreciation of $306 million is less than CAPEX of $572 million. d. If Stryker can make a better return on reinvesting its cash back into the business than the return shareholders can earn for themselves on the cash they would receive, Stryker should forgo paying dividends or repurchasing shares. Many companies with large cash inflows, especially mature companies in relatively saturated markets, find it hard to uncover additional investment opportunities. In those cases, returning the cash to investors is better than investing it in marketable securities, because investors can do that for themselves. e. Stryker is a large, mature, and profitable company. In fiscal 2018, the company generated less operating cash flows than reported profits but the difference relates to income tax changes arising from the 2017 tax law changes. The company funds capital expenditures primarily with operating cash flows with minimal need for external financing. In the financing area, the company is borrowing to repurchase stock and to pay dividends, a substitution of lower-cost debt for higher-cost equity. This is a typical profile for a large, well-capitalized company like Stryker. In sum, Stryker is exceptionally strong, and the company will likely continue investing in its infrastructure. P11-50. (40 minutes) a. Depreciation is added back to undo the effect it had on the income statement. Verizon deducted $17,403 million of depreciation expense in computing net income. Depreciation is a noncash expense so Verizon did not actually use $17,403 million cash to pay depreciation. Thus, to determine how much cash was generated, net income is too low by the depreciation amount of $17,403 million. The depreciation add-back is NOT a source of cash as some mistakenly believe. Cash is, ultimately, generated by profitable operations, not by depreciation. The relative size of the add-back indicates that the company is extremely capital intensive. The add-back is 109% of net income ($17,403 / $16,039). b. The MD&A section of the 10-K provides management’s assessment of the operating results and investment activities of the company. Because it is regulated by SEC disclosure rules, the 10-K is a source of useful information that includes less promotional material than other statements by the company. continued ©Cambridge Business Publishers, 2021 Solutions Manual, Module 11 11-23 b. continued Companies must continue to invest in their infrastructure, both for new additions and replacement, to remain competitive. Depreciation expense represents the using up of depreciable assets. In general, we should expect capital expenditures (CAPEX) to exceed depreciation expense. This indicates that the company is growing its infrastructure as well as replacing the portion that is wearing out. Verizon’s CAPEX is slightly smaller than its depreciation expense in 2018. The company appears to be replacing depreciated assets but not making new additions to its infrastructure. c. During 2018, Verizon used cash of $3,781 million to repay debt, net ($5,967 + $4,810 – $10,923 - $3,635 all in millions). While the level of debt decreased during the year, the balance is still very high. This high debt load places severe demands on Verizon’s operating cash flow. Cash that should be used to develop its infrastructure must be allocated to the payment of debt. This is particularly problematic for Verizon as it is facing stiff competition from rival Comcast and must make substantial capital investments to remain competitive. d. Unlike debt, dividends are not a contractual obligation until declared by the board of directors. Although its stock price may fall if the company reduces dividends, shareholders cannot force the company into bankruptcy like debt holders can. Nevertheless, high dividend-paying companies, such as Verizon, typically continue their dividend payout even if they must borrow funds to do so as failure to maintain dividend payment levels would depress the market price of the company stock and increase the cost of equity capital should the company need to use its stock to raise capital or acquire another company. e. Verizon’s operations generated a significant amount of cash. Its capital expenditures are significant as the company continues to replace depreciating assets. High capital outlays would, ordinarily, not be a problem were it not for the company’s significant existing debt load. Verizon’s debt repayment for 2018 was $3,781 million and the company paid interest expense on top of that amount (recorded in its income statement). Although the company is financially strong, balancing its debt level with the cash flow needs for capital expenditures to support its operating activities and dividends to support its stock price is a difficult challenge facing the company. ©Cambridge Business Publishers, 2021 11-24 Financial Accounting for MBAs, 8 th Edition P11-51. (20 minutes) a. Operating activities Net income $130,000 Adjustments to reconcile net income to operating cash flow Depreciation $28,000 Accounts receivable increase (10,000) Prepaid expense decrease 3,000 Accounts payable increase 6,000 Wages payable decrease (4,000) 23,000 Net cash provided from operating activities $153,000 b. No, the positive sign on depreciation expense does not mean that Petroni Company is generating cash by recording depreciation. The depreciation add-back undoes the noncash depreciation expense that is included in the computation of net income. Sales and profitable operations generate cash; depreciation expense does not. c. The increase in accounts receivable relates to sales on credit. Because Petroni Company uses GAAP, the company recognizes revenues when “earned,” even if no cash is received. These credit sales are included in net income even though the company received no cash from the sale. That means that net income is higher than cash from operations. Subtracting the increase in receivables offsets the noncash sales included in net income. d. Prepaid expenses arise when a company pays out cash in advance of incurring the expense. An example is the payment for radio or TV advertising that does not air in the current period. When paid, the company records the decrease in cash and records an asset, prepaid advertising. When the ads air, the company reduces the prepaid advertising account and recognizes an expense even though no cash was paid in the period the ads aired. The effect is that net income is lower (by the advertising expense) than cash from operations. To reconcile the two, the company needs to add back the decrease in the prepaid expense asset. ©Cambridge Business Publishers, 2021 Solutions Manual, Module 11 11-25 P11-52. (35 minutes)—DIRECT METHOD a. Cash, December 31, 2019 $11,000 Less: Cash, December 31, 2018 5,000 Cash increase during 2019 $ 6,000 b. WOLFF COMPANY Statement of Cash Flows For Year Ended December 31, 2019 Cash Flows from Operating Activities Cash Received from Customers $626,000 Cash Paid for Merchandise Purchased $ 463,000 Cash Paid to Employees 83,000 Cash Paid for Insurance 6,000 Cash Paid for Interest 9,000 Cash Paid for Income Taxes 30,000 591,000 Net Cash Provided by Operating Activities 35,000 Cash Flows from Investing Activities Purchase of PPE (55,000) Cash Flows from Financing Activities Issuance of Bonds Payable 55,000 Payment of Dividends (29,000) Net Cash Provided by Financing Activities 26,000 Net Increase in Cash 6,000 Cash at Beginning of Year 5,000 Cash at End of Year $ 11,000 ©Cambridge Business Publishers, 2021 11-26 Financial Accounting for MBAs, 8 th Edition P11-53. (50 minutes)—DIRECT METHOD a. Cash, December 31, 2019 .......................................... $49,000 Less: Cash, December 31, 2018 ................................ 28,000 Cash increase during 2019 ......................................... $21,000 b. ARCTIC COMPANY Statement of Cash Flows For Year Ended December 31, 2019 Operating Activities Cash Received from Customers $736,000 Cash Paid for Merchandise Purchased $ 542,000 Cash Paid to Employees 190,000 Cash Paid for Advertising 28,000 Cash Paid for Interest 12,000 772,000 Net Cash Used by Operating Activities (36,000) Investing Activities Sale of Land 70,000 Purchase of Equipment (183,000)* Net Cash Used by Investing Activities (113,000) Financing Activities Issuance of Bonds Payable 200,000 Purchase of Treasury Stock (30,000) Net Cash Provided by Financing Activities 170,000 Net Increase in Cash 21,000 Cash at Beginning of Year 28,000 Cash at End of Year $ 49,000 * The equipment purchased is equal to the sum of the increase in PPE assets account ($138,000) and the book value of the land sold ($45,000). ©Cambridge Business Publishers, 2021 Solutions Manual, Module 11 11-27 P11-54. (60 minutes)—DIRECT METHOD a. Cash, December 31, 2019 .......................................... $27,000 Less: Cash, December 31, 2018 ................................ 18,000 Cash increase during 2019 ......................................... $ 9,000 b. DAIR COMPANY Statement of Cash Flows For Year Ended December 31, 2019 Cash Flows from Operating Activities Cash Received from Customers .......................................... $695,000 Cash Paid for Merchandise Purchased ............................... $428,000 Cash Paid for Wages and Other Operating Expenses ......... 97,000 Cash Paid for Interest .......................................................... 13,000 Cash Paid for Income Taxes ................................................ 38,000 (576,000) Net Cash Provided by Operating Activities .......................... 119,000 Cash Flows from Investing Activities Sale of Equipment ............................................................... 17,000 Cash Flows from Financing Activities Retirement of Bonds Payable .............................................. (125,000) Issuance of Common Stock ................................................. 24,000 Payment of Dividends .......................................................... (26,000) Net Cash Used by Financing Activities ................................ (127,000) Net Increase in Cash ................................................................. 9,000 Cash at Beginning of Year ......................................................... 18,000 Cash at End of Year .................................................................. $ 27,000 c. (1) Reconciliation of Net Income to Net Cash Flow from Operating Activities Operating Activities Net Income $ 85,000 Add (Deduct) Items to Convert Net Income to Cash Basis Depreciation 22,000 Amortization 7,000 Loss on Bond Retirement 5,000 Accounts Receivable Increase (5,000) Inventory Decrease 6,000 Prepaid Expenses Increase (2,000) Accounts Payable Increase 6,000 Interest Payable Decrease (3,000) Income Tax Payable Decrease (2,000) Net Cash Provided by Operating Activities $119,000 (2) Schedule of Noncash Investing and Financing Activities Issuance of Bonds Payable to Acquire Equipment $ 60,000 ©Cambridge Business Publishers, 2021 11-28 Financial Accounting for MBAs, 8 th Edition P11-55. (60 minutes)—DIRECT METHOD a. Cash and Cash Equivalents, December 31, 2019 $19,000 Less: Cash and Cash Equivalents, December 31, 2018 25,000 Cash and Cash Equivalents decrease during 2019 $ 6,000 b. RAINBOW COMPANY Statement of Cash Flows For Year Ended December 31, 2019 Operating Activities Cash Received from Customers ........................................... $740,000 Cash Received as Dividends ................................................ 15,000 $755,000 Cash Paid for Merchandise Purchased ................................ 462,000 Cash Paid for Wages and Other Op Expenses ..................... 134,000 Cash Paid for Interest ........................................................... 12,000 Cash Paid for Income Taxes ................................................. 46,000 (654,000) Net Cash Provided by Operating Activities ........................... 101,000 Investing Activities Sale of Investments .............................................................. 60,000 Purchase of Land .................................................................. (90,000) Improvements to Building ..................................................... (95,000) Sale of Equipment ................................................................ 14,000 Net Cash Used by Investing Activities .................................. (111,000) Financing Activities Issuance of Bonds Payable .................................................. 30,000 Issuance of Common Stock .................................................. 24,000 Payment of Dividends .......................