Question

Statement of Cash Flows (Indirect Method)
The Wolff Company's income statement and comparative balance sheets at December 31 of 2013 and 2012 are shown below:

WOLFF COMPANY Income Statement For the Year Ended December 31, 2013
Sales Revenue		$889,000
Cost of Goods Sold	$602,000
Wages Expense	120,400
Insurance Expense	11,200
Depreciation Expense	23,800
Interest Expense	12,600
Income Tax Expense	40,600	810,600
Net Income		$78,400

WOLFF COMPANY Balance Sheets
	Dec. 31, 2013	Dec. 31, 2012
Assets
Cash	$15,400	$7,000
Accounts Receivable	57,400	44,800
Inventory	126,000	84,000
Prepaid Insurance	7,000	9,800
Plant Assets	350,000	273,000
Accumulated Depreciation	(95,200)	(71,400)
Total Assets	$460,600	$347,200
Liabilities and Stockholders' Equity
Accounts Payable	$9,800	$14,000
Wages Payable	12,600	8,400
Income Tax Payable	9,800	11,200
Bonds Payable	182,000	105,000
Common Stock	126,000	126,000
Retained Earnings	120,400	82,600
Total Liabilities and Stockholders' Equity	$460,600	$347,200

Cash dividends of $40,600 were declared and paid during 2013. Plant assets were purchased for cash and bonds payable were issued for cash. Bond interest is paid semi-annually on June 30 and December 31. Accounts payable relate to merchandise purchases.

Required
a. Calculate the change in cash that occurred during 2013.
b. Prepare a statement of cash flows using the indirect method.
c. Compute free cash flow.
d. Compute the operating-cash-flow-to-current-liabilities ratio.
e. Compute the operating-cash-flow-to-capital-expenditures ratio.

a. Change in Cash during 2013 $Answer AnswerIncreaseDecrease

b. Use a negative sign with cash outflow answers.

WOLFF COMPANY Statement of Cash Flows For Year Ended December 31, 2013
Cash Flow from Operating Activities
Net Income		Answer
Add (deduct) items to convert net income to cash basis
Depreciation		Answer
Accounts Receivable	AnswerIncreaseDecrease	Answer
Inventory	AnswerIncreaseDecrease	Answer
Prepaid Insurance	AnswerIncreaseDecrease	Answer
Accounts Payable	AnswerIncreaseDecrease	Answer
Wages Payable	AnswerIncreaseDecrease	Answer
Income Tax Payable	AnswerIncreaseDecrease	Answer
Cash Flow Provided by Operating Activities		Answer
Cash Flow from Investing Activities
Purchase of Plant Assets		Answer
Cash Flow from Financing Activities
Issuance of Bonds Payable		Answer
Payment of Dividends		Answer
Cash Provided by Financing Activities		Answer
Net Change in Cash		Answer
Cash at Beginning of Year		Answer
Cash at End of Year		Answer

c. Free cash flow $Answer

d. Operating-cash-flow-to-current-liabilities ratio.
Round answer to two decimal places.
Answer

e. Operating-cash-flow-to-capital-expenditures ratio.
Round answer to two decimal places.
Answer

Answer 1

a. Change in Cash during 2013                                       

               = Cash balance at end of 2013 – Cash balance at end of 2012

                =   15,400 – 7,000    

                =   8,400

    

So, Cash has increased by $8,400

Or Alternatively Change in Cash

= Cash flow from operating activity + Cash flow from investing activity + Cash flow from Financing activity

b. Use a negative sign with cash outflow answers.

WOLFF COMPANY Statement of Cash Flows For Year Ended December 31, 2013 Cash Flow From operating Activities Amount ($) Net Income 78,400 Add (deduct) items to convert net income to cash basis Depreciation 23,800 Accounts Receivable -12,600 Inventory -42,000 Prepaid Insurance 2,800 Accounts Payable -4,200 Wages Payable 4,200 Income Tax Payable -1,400 Cash Flow Provided by Operating Activities 49,000 Cash Flow from Investing Activities Purchase of Plant Assets -77,000 Cash Flow from Financing Activities Issuance of Bonds Payable 77,000 Payment of Dividends -40,600 Cash Provided by Financing Activities 36,400 Net Change in Cash 8,400 Cash at Beginning of Year 7,000 Cash at End of Year 15,400

c. Free cash flow = Operating Cash Flow – Capital Expenditure

                              = 49,000 – 77,000

                              = – 28,000

   

d. Operating-cash-flow-to-current-liabilities ratio.
                        = Cash Flow from Operations / Current Liabilities

Cash Flow from Operations = $ 49,000

Current Liabilities =

Accounts Payable	9,800
Wages Payable	12,600
Income Tax Payable	9,800

        Total                                                      $ 32,200

           

So, Operating-cash-flow-to-current-liabilities ratio.
                        = Cash Flow from Operations / Current Liabilities

= 49,000 / 32,200
= 1.52

e. Operating-cash-flow-to-capital-expenditures ratio.

= Cash Flow from Operations / Capital Expenditure

Cash Flow from Operations = $ 49,000

Capital Expenditure       = $77,000

         

So, Operating-cash-flow-to-capital-expenditures ratio = 49000 / 77000

                                                                                              = 0.64