Shown are the comparative balance sheets of Dang Corporation for December 31, 2019 and 2018: December...

Shown are the comparative balance sheets of Dang Corporation for December 31, 2019 and 2018:

	December 31
	2019	2018
Cash and cash equivalents ..................................	$ 350,000	$ 320,000
Accounts receivable .............................................	327,600	356,000
Inventories ...........................................................	822,000	780,000
Available-for-sale securities ................................	0	200,000
Equipment ...........................................................	2,400,000	2,040,000
Accumulated depreciation ...................................	(700,000)	(760,000)
	$3,199,600	$2,936,000

Accounts payable ...............................................	$ 459,000	$ 381,000
Bonds payable, due 2019 ...................................	0	400,000
Common stock, $20 par ......................................	1,800,000	1,600,000
Paid-in capital in excess of par ...........................	280,000	200,000
Retained earnings ...............................................	660,600	355,000
	$3,199,600	$2,936,000

Additional information:

(a)	Net income for 2019, $545,600.
(b)	Depreciation reported on income statement, $140,000.
(c)	Fully depreciated equipment, no salvage value, was scrapped. Equipment was purchased for $560,000.
(d)	Bonds of $400,000 had been issued at par; retirement in 2019 resulted in no gain or loss.
(e)	10,000 shares of common stock were issued for cash at $28 per share.
(f)	Cash dividends declared and paid, $240,000.
(g)	Available-for-sale securities were sold for $300,000.

3-1. Prepare a statement of cash flows for Dang Corporation for 2019, using the indirect method. >>Place thepage with your final copy of your labelled calculations before the SCF!

3-2. Compute the current cash debt coverage, cash debt coverage, free cash flow, and cash flow to net income ratios (see textbook pages 5-31 to 5-32 and a more complete discussion in 24-33 onward in textbook—remember, it is on reserve in the library…as well as in e-book form on WileyPlus)

3-3. What does cash debt coverage mean? If this is less than one, what does that imply?

3-4. If cash flow to net income is less than one, what does that suggest?

3-5. Interpret the results of the free cash flow ratio you computed in 3-2.

Expert Solution

Answer to Question 3.1

Indirect Method
Dang Corporation
Statement of Cash Flow for the year ended December 31 , 2019
	$	$
Particulars	Amount	Amount
*Cash Flow fron Operating activities*
Net Income		5,45,600.00
Adjustments to reconcile net income to net cash from operating activities:
Depreciation	1,40,000.00
Profit on Sale of Available for sale Securities	- 1,00,000.00	40,000.00
Operating Profit before Working capital Changes		5,85,600.00
Adjustments for working capital changes
Inventory (Increase)	- 42,000.00
Accounts Payable ( Increase)	78,000.00
Accounts Receivable (Decrease)	28,400.00
	-	64,400.00
Cash Flow Generated from Operations		6,50,000.00
Net cash flow from Operating Activities		6,50,000.00
*Cash Flow fron Investing activities*
Sale proceeds- Available -for -sale securities	3,00,000.00
Purchase of Property Plant and Equipment	- 5,60,000.00
Net cash flow from Investing Activities		-2,60,000.00
*Cash Flow fron Financing activities*
Bonds Payable - Decrease	- 4,00,000.00
Proceeds from Issue of Common Stock	2,00,000.00
Paid in Capital in excess of Par	80,000.00
Dividend Paid	- 2,40,000.00
Net cash flow from Financing Activities		-3,60,000.00
Net Increase in Cash and Cash Equivalents		30,000.00
Cash and Cash Equivalents at the Beginning of the Period		3,20,000.00
Cash and Cash Equivalents at the End of the Period		3,50,000.00

		-

		-

		-


Working Note:
Property , Plant and Equipment Account
To	Balance b/d(Net of Accumulated Depreciation)	1280000	By	Bank	0
To	P/L A/c Profit	0	By	Depreciation	140000
To	Bank-Purchase	560000
			By	Balance c/d	1700000
		1840000			1840000

*Answe to Question 3.2*

Curent Cash Debt Coverage Ratio

Net cash provided by operating Activities	650000
Avarage Current Liabilities	420000
Curent Cash Debt Coverage Ratio	1.547619048

Free Cash flows

Cash from Operations - Capital Expenditure

Net cash provided by operating Activities	650000
Capital Expenditures (Purchase of Plant & Equipment)	560000
Free Cash flows	90000
Cash flows to net income Ratio

Operating Cash flow/Revenue
Operating Cash Flow	650000
Revenue	5,45,600.00
Cash flows to net income Ratio	1.19
*Answer to Question 3.3*
Cash Debt Coverage ratio
Shows how much of the companies total liabilities can be paid using net operating cash flows. If it is less than 1 it implies that low liquidity of the company , not generating enough cash to pay off its liabilities by its current operations.

ekkarill92 answered 1 year ago

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