Statement of Cash Flows—Indirect Method

The comparative balance sheet of Merrick Equipment Co. for December 31, 20Y9 and 20Y8, is as follows:

Additional data obtained from an examination of the accounts in the ledger for 20Y9 are as follows:

1. Equipment and land were acquired for cash.
2. There were no disposals of equipment during the year.
3. The investments were sold for $91,800 cash.
4. The common stock was issued for cash.
5. There was a $141,680 credit to Retained Earnings for net income.
6. There was a $102,000 debit to Retained Earnings for cash dividends declared.

Required:

Prepare a statement of cash flows, using the indirect method of presenting cash flows from operating activities. Use the minus sign to indicate cash outflows, cash payments, decreases in cash, or any negative adjustments.

Braxen Industries, which manufactures and sells a highly successful line of summer lotions and insect repellents, has decided to diversify in order to stabilize sales throughout the year. A natural area for the company to consider is the production of winter lotions and creams to prevent dry and chapped skin.

After considerable research, a winter products line has been developed. However, Braxen's president has decided to introduce only one of the new products for this coming winter. If the product is a success, further expansion in future years will be initiated.

The product selected (called Chap-Off) is a lip balm that will be sold in a lipstick-type tube. The product will be sold to wholesalers in boxes of 24 tubes for $9 per box. Because of excess capacity, no additional fixed manufacturing overhead costs will be incurred to produce the product. However, a $105,000 charge for fixed manufacturing overhead will be absorbed by the product under the company’s absorption costing system.

Using the estimated sales and production of 150,000 boxes of Chap-Off, the Accounting Department has developed the following manufacturing cost per box:

The costs above relate to making both the lip balm and the tube that contains it. As an alternative to making the tubes for Chap-Off, Braxen has approached a supplier to discuss the possibility of buying the tubes. The purchase price of the supplier's empty tubes would be $1.70 per box of 24 tubes. If Braxen Industries stops making the tubes and buys them from the outside supplier, its direct labor and variable manufacturing overhead costs per box of Chap-Off would be reduced by 10% and its direct materials costs would be reduced by 30%.

5. What is the maximum price that Braxen should be willing to pay the outside supplier for a box of 24 tubes?

6. Instead of sales of 150,000 boxes of tubes, revised estimates show a sales volume of 185,000 boxes of tubes. At this higher sales volume, Braxen would need to rent extra equipment at a cost of $65,000 per year to make the additional 35,000 boxes of tubes. Assuming that the outside supplier will not accept an order for less than 185,000 boxes of tubes, what is the financial advantage (disadvantage) in total (not per box) if Braxen buys 185,000 boxes of tubes from the outside supplier? Given this new information, should Braxen Industries make or buy the tubes?

7. Refer to the data in Required 6. Assume that the outside supplier will accept an order of any size for the tubes at a price of $1.70 per box. How many boxes of tubes should Braxen make? How many boxes of tubes should it buy from the outside supplier?

Diego Company manufactures one product that is sold for $73 per unit in two geographic regions—the East and West regions. The following information pertains to the company’s first year of operations in which it produced 44,000 units and sold 39,000 units.

The company sold 29,000 units in the East region and 10,000 units in the West region. It determined that $180,000 of its fixed selling and administrative expenses is traceable to the West region, $130,000 is traceable to the East region, and the remaining $90,000 is a common fixed cost. The company will continue to incur the total amount of its fixed manufacturing overhead costs as long as it continues to produce any amount of its only product.  

7. What is the amount of the difference between the variable costing and absorption costing net operating incomes (losses)?

8a. What is the company’s break-even point in unit sales?

8b. Is it above or below the actual sales volume? Above Below

9.If the sales volumes in the East and West regions had been reversed, what would be the company’s overall break-even point in unit sales?

10. What would have been the company’s variable costing net operating income (loss) if it had produced and sold 39,000 units?

Henry Hawkins Industries of Batavia, Ohio, manufactures and sells one product. The company assembled the following projections for its first year of operations:

During its first year of operations Henry Hawkins expects to produce 25,000 units and sell 20,000 units. The budgeted selling price of the company’s only product is $66 per unit.

Required:

(answer each question independently by referring to the original data):

1. Assuming that Henry Hawkins' projections are accurate, what will be its absorption costing net operating income (loss) in its first year of operations?

2. Henry Hawkins is considering investing in a higher quality raw material that will increase its direct materials cost by $1 per unit. It estimates that the higher quality raw material will increase sales by 1,000 units. What will be the company’s revised absorption costing net operating income (loss) if it invests in the higher quality raw material and continues to produce 25,000 units?

3. Henry Hawkins is considering raising its selling price by $1.00 per unit with an expectation that it will lower unit sales by 1,500 units. What will be the company’s revised absorption costing net operating income (loss) if it raises its price by $1.00 and continues to produce 25,000 units?

4. Assuming that Henry Hawkins' projections are accurate, what will be its variable costing net operating income (loss) in its first year of operations?

5. Henry Hawkins is considering investing in a higher quality raw material that will increase its direct materials cost by $1 per unit. It estimates that the higher quality raw material will increase sales by 1,000 units. What will be the company’s revised variable costing net operating income (loss) if it invests in the higher quality raw material and continues to produce 25,000 units?

6. Henry Hawkins is considering raising its selling price by $1.00 per unit with an expectation that it will lower unit sales by 1,500 units. What will be the company’s revised variable costing net operating income (loss) if it raises its price by $1.00 and continues to produce25,000 units?

7. What is Henry Hawkins' break-even point in unit sales? What is its break-even point in dollar sales?

8. What is the company’s projected margin of safety in its first year of operations?

Children Toys, Ltd. produces a toy called the Joy .Overhead is applied to products on the basis of direct labour hours. The company has recently implemented a standard cost system to help control costs and has established the following standards for the Joy toys:

Direct materials: 6 units per toy at $0.50 per unit

Direct labour: 1.3 hours per toy at $ 8.00 per hour

Variable manufacturing overhead: $4.00 per hour

During July, the company produced 3,000 toys. The fixed overhead expense budget for July was $24,180 with 4030 direct labour –hours as the denominator level of activity. Production data for the month on the toys follow:

Direct materials: 25,000 units were purchased at a cost of $0.48 per unit. 5,000 of these units were still in inventory at the end of the month.

Direct Labour : 4,000 direct labour hours were worked at a cost of $36,000.

Variable overhead : Actual cost in July was $ 17,000.

Fixed Overhead : Actual cost in July was $25,000.

Required:

1. Prepare diagrams for the materials(5), labour(4), variable manufacturing overhead(4) and fixed manufacturing overhead variances(4)

2. Prepare journal entries only for materials and labour.

George Products had sales of $13,000,000 for 2014. On December 31, 2014, the balance in Accounts Receivable was $4,500,000. An aging analysis of the accounts receivable indicated that $125,000 in accounts are expected to be uncollectible.

Prepare the adjusting entry to record estimated bad debts expense using the percentage of receivables basis under each of the following independent assumptions:

      Allowance for Doubtful Accounts has a credit balance of $2,300 before adjustment.

            Allowance for Doubtful Accounts has a debit balance of $600 before adjustment

Using the percentage of sales method 1% of sales is expected to be uncollectible. Prepare the adjusting entry under each of the following independent assumptions using the percent of sales method:

      Allowance for Doubtful Accounts has a credit balance of $2,300 before adjustment.

            Allowance for Doubtful Accounts has a debit balance of $600 before adjustment

1)The ability to refinance short-term obligations on a long-term basis can be demonstrated if the company has already refinanced those obligations after the date of the balance sheet but before it is issued.

True

False  

2)

Which of the following statements does not describe an essential characteristic of a liability?

The transaction or event obligating the enterprise has already occurred.

The identity of the recipient must be known to the obligated party.

The obligated entity has little or no discretion to avoid the future sacrifice.

A liability is a present obligation that will be settled by a probable future transfer or use of assets.

I'm looking for a Sources and Uses of Funds statement/spreadsheet based on the info below:

Benjamin Jacobs has been appointed executor of Della Braham’s estate. Mr. Jacobs recorded the following with respect to Ms. Braham’s estate:

Assets at date of death (recorded at fair value):

Cash $700,000

Life insurance receivable 200,000

Investments

Belko Holdings Common Stock 12,000

Lowe’s Inc. Common Stock 25,000

McDonald’s Corp Common Stock 30,000

  Petco Inc. Common Stock 31,000

Rental house 250,000

Cash outflows:

Funeral expenses $18,000

Executor fees 10,000

Repairs (ordinary) on the rental house 1,000

Debts 50,000

Distribution of income to Bill Braham, income beneficiary 2,000

Cash inflows:

Sale of Lowe’s stock $27,000

Rent income ($2,000 earned prior to death) 10,000

Dividend income ($3,000 earned prior to death) 15,000

Life insurance proceeds 200,000

Debts of $20,000 are still outstanding. The Belko shares were transferred to Belinda Braham, to whom they were designated. Ms. Della Braham left instructions that executor fees were to be paid out of the principal of the estate. Prepare an interim charge and discharge statement for this estate.

At January 1, 2020, the credit balance of Whispering Winds Corp.’s Allowance for Doubtful Accounts was $401,000. During 2020, the bad debt expense entry was based on a percentage of net credit sales. Net sales for 2020 were $80 million, of which 90% were on account. Based on the information available at the time, the 2020 bad debt expense was estimated to be 0.75% of net credit sales. During 2020, uncollectible receivables amounting to $508,500 were written off against the allowance for doubtful accounts. The company has estimated that at December 31, 2020, based on a review of the aged accounts receivable, the allowance for doubtful accounts would be properly measured at $530,500.

Prepare a schedule calculating the balance in Whispering Winds Corp.’s Allowance for Doubtful Accounts at December 31, 2020.

Prepare any necessary journal entry at year end to adjust the allowance for doubtful accounts to the required balance. (Credit account titles are automatically indented when amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts.)

The one year interest rates in Australia and US are 3% and 1%, respectively. The current spot rate is $0.75/AUD. (Show calculation and steps)

a. What should the one year forward rate be (if IRP holds).

b. If the forward rate is $0.70/AUD is there an arbitrage? If so, how can an arbitrageur incorporate a cashless (i.e. not use any of her current cash) arbitrage? Hint: She will need to borrow in the US or Australia at the current rates. Assume that she will use an amount of 1,000,000 USD or AUD (you must choose the right one…)

Ronaldo Company has not yet prepared the statement of cash flows. The Balance sheet as of December 31, 2018 and January 1, 2018 and the additional information regarding the statement of income and retained earnings for the year are presented below.

Ronaldo Company

Comparative Balance Sheet

(Dollars in Millions)

Assets                                                                  12/31/2018                                   1/1/2018    

Current Assets:

            Cash                                                                $   98                                     $ 158

            Account Receivables                                      1,290                                      1,160

            Inventory                                                        1,320                                     1,230

Total Current Assets                                                   2,708                                       2,548

Property, Plant, and Equipment                     3,030                           2,932

Less Accumulated Depreciation                     1,530                          1,282

Net Property, Plant, and Equipment                             1,500                                      1,650

Total Assets                                                              $4,208                                 $4,198

Liability and Equity

Current Liability:

            Account payable                                             $500                                           $310

            Accrued Liability                                              380                                             330

            Income tax payable                                            152                                             140

Total current Liability                                                $1,032                                         $780

Bonds payable                                                                  900                                         1,240

Total Liability                                                               1,932                                         2,020

Stockholders’ Equity:

            Common Stock                                                     322                                            322

            Retained earnings                                              1,954                                          1,856

Total Stockholders’ Equity                                             2,276                                         2,178

Total Liability and Stockholders’ Equity                      $4,208                                      $4,208

Ronaldo Income statement ((Dollars in Millions)

Net Income                                                     $7,200

Cost of goods sold                                          5,100

Gross Margin                                                  2,100

Selling and administrative Expenses              1,750

Net Operating Income                                        350

Nonoperation items:

            Gain on sale of Equipment                        6

Income before Taxes                                            356

Income tax                                                            126

Net Income                                                        $ 230

Ronaldo also provided the following information:

1. The company sold equipment that had an original cost of $26 million and accumulated depreciation of $16 million. The cash proceeds from the sale were $16 million. The gain on the sale was $6 million
2. The company did not issue any bonds during the year.
3. The company paid a cash dividend during the year
4. The company did not complete any common stock transactions during the year

Required:

1. Prepare a statement of cash flows for the year using the indirect method
2. Compute Ronaldo’s free cash flow
3. Assume that Ronaldo has sales of $7,600, Net income of $230, and net cash provided by operating activities of $300 in the prior year. Prepare a memo that summarizes your interpretations of Ronaldo’s financial performance
4. Use the analysis of Ronaldo Company to illustrate how information in the balance sheet and the statement of cash flows helps the users of the financial statements.

ANSWER PART 3 AND 4

Work in Process Account Data for Two Months; Cost of Production Reports

Hearty Soup Co. uses a process cost system to record the costs of processing soup, which requires the cooking and filling processes. Materials are entered from the cooking process at the beginning of the filling process. The inventory of Work in Process—Filling on April 1 and debits to the account during April were as follows:

During April, 1,200 units in process on April 1 were completed, and of the 29,160 units entering the department, all were completed except 3,500 units that were 40% completed. Charges to Work in Process—Filling for May were as follows:

During May, the units in process at the beginning of the month were completed, and of the 33,500 units entering the department, all were completed except 1,600 units that were 20% completed.

Required:

1. Enter the balance as of April 1 in a four-column account for Work in Process—Filling. Record the debits and credits in the account for April. Construct a cost of production report and present computations for determining (a) equivalent units of production for materials and conversion; (b) cost per equivalent unit; (c) cost of goods finished, differentiating between units started in the prior period and units started and finished in April; and (d) work in process inventory. If an amount box does not require an entry, leave it blank.

2. Provide the same information for May by recording the May transactions in the four-column work in process account. Construct a cost of production report and present the May computations (a through d) listed in part (1). If an amount box does not require an entry, leave it blank.