Problem 21-11 Prepare a statement of cash flows; direct method [LO21-3, 21-8]

The comparative balance sheets for 2018 and 2017 and the income statement for 2018 are given below for Arduous Company. Additional information from Arduous’s accounting records is provided also.

Additional information from the accounting records:

1. Investment revenue includes Arduous Company’s $16 million share of the net income of Demur Company, an equity method investee.
2. Treasury bills were sold during 2018 at a gain of $3 million. Arduous Company classifies its investments in Treasury bills as cash equivalents.
3. A machine originally costing $88 million that was one-half depreciated was rendered unusable by a flood. Most major components of the machine were unharmed and were sold for $18 million.
4. Temporary differences between pretax accounting income and taxable income caused the deferred income tax liability to increase by $12 million.
5. The preferred stock of Tory Corporation was purchased for $34 million as a long-term investment.
6. Land costing $55 million was acquired by issuing $27 million cash and a 12%, four-year, $28 million note payable to the seller.
7. The right to use a building was acquired with a 15-year lease agreement; present value of lease payments, $91 million. Annual lease payments of $8 million are paid at the beginning of each year starting January 1, 2018.
8. $69 million of bonds were retired at maturity.
9. In February, Arduous issued a stock dividend (7.6 million shares). The market price of the $5 par value common stock was $7.50 per share at that time. Also the company paid a cash dividend.
10. In April, 1 million shares of common stock were repurchased as treasury stock at a cost of $18.00 million.

Required:
Prepare the statement of cash flows of Arduous Company for the year ended December 31, 2018. Present cash flows from operating activities by the direct method. (Do not round your intermediate calculations. Enter your answers in millions (i.e., 10,000,000 should be entered as 10.). Amounts to be deducted should be indicated with a minus sign.)

New Stock Issue

Bynum and Crumpton, a small jewelry manufacturer, has been successful and has enjoyed a positive growth trend. Now B&C is planning to go public with an issue of common stock, and it faces the problem of setting an appropriate price for the stock. The company and its investment banks believe that the proper procedure is to conduct a valuation and select several similar firms with publicly traded common stock and to make relevant comparisons.
Several jewelry manufacturers are reasonably similar to B&C with respect to product mix, asset composition, and debt/equity proportions. Of these companies, Abercrombe Jewelers and Gunter Fashions are most similar. When analyzing the following data, assume that the most recent year has been reasonably "normal" in the sense that it was neither especially good nor especially bad in terms of sales, earnings, and free cash flows. Abercrombe is listed on the AMEX and Gunter on the NYSE, while B&C will be traded in the NASDAQ market.

1. B&C is a closely held corporation with only 500,000 shares outstanding. Free cash flows have been low and in some years negative due to B&C's recent high sales growth rates, but as its expansion phase comes to an end, B&C's free cash flows should increase. B&C anticipates the following free cash flows over the next 5 years:

   Year	1	2	3	4	5
   FCF	$1,000,000	$1,050,000	$1,208,000	$1,329,000	$1,462,000

   After Year 5, free cash flow growth will be stable at 7% per year. Currently, B&C has no nonoperating assets, and its WACC is 12%. Using the free cash flow valuation model, estimate the (1) horizon value, (2) intrinsic value of operations, (3) intrinsic value of equity, and (4) intrinsic per share price. Do not round intermediate calculations. Write out your answer completely. For example, 5 million should be entered as 5,000,000. Round your answers for the value of equity to the nearest dollar and for the value of equity per share to the nearest cent.

   (1) Horizon value	$
   (2) Intrinsic value of operations	$
   (3) Intrinsic value of equity	$
   (4) Intrinsic per share price	$

2. Calculate debt to total assets, P/E, market to book, P/FCF, and ROE for Abercrombe, Gunter, and B&C. For calculations that require a price for B&C, use the per share price you obtained with the corporate valuation model in Part a. Do not round intermediate calculations. Round your answers to two decimal places.

   	Abercrombe		Gunter		B&C
   D/A		%		%		%
   P/E
   Market/Book
   ROE		%		%		%
   P/FCF

3. Using Abercrombe's and Gunter's P/E, Market/Book, and Price/FCF ratios, calculate the range of prices for B&C's stock that would be consistent with these ratios. For example, if you multiply B&C's earnings per share by Abercrombe's P/E ratio you get a price. What range of prices do you get? Do not round intermediate calculations. Round your answers to the nearest cent.

   The range of prices:
   from $   to $  

   How does this compare with the price you get using the corporate valuation model?

   The price obtained with the corporate valuation model is -Select-withinout ofItem 22 this range of prices.

(Answer length - approximately 100 words)

From January 2005, Australia has adopted the accounting standards issued by the International Accounting Standard Board (IASB). As a result, the role and functions of the Australian Accounting Standards Board (AASB) has changed since 2005.

Required:

Given the current role of the AASB, do you think that the AASB should be removed and Australian companies should simply follow the IASB standards? Provide two justifications to support your answer.  

2. Enter the following record into the Inventory table using data listed below:

3. The Chevrolet Lumina was sold on 5/20/08 by Bauer for $9,300. Update the INVENTORY table and modify date sold, selling price, and repnumber.
4. Write SQL statements to query the following information
   1. All vehicles available for sale with a selling price less than $6,000, sorted by cost in descending order.
   2. All vehicles sold, grouped by Sales Rep.
   3. All vehicles made by Ford and Toyota.

The following selected information is from Company A's Year 2 and Year 3 financial statements:

The company uses the balance-sheet approach to calculate the allowance for uncollectible accounts. The company estimates that 4% of its gross accounts receivable will become uncollectible. During Years 2 and 3, no accounts previously written off became payable.

Complete Company A's balance sheet using the information above. Enter the appropriate amounts in the designated cells below. Enter all amounts as positive values. Round all amounts to the nearest dollar. If no entry is necessary, enter a zero (0).

A competitive firm maximizes profit at the point where marginal revenue equals marginal cost; a monopolist maximizes profit at the point where marginal revenue exceeds marginal cost.

true or false

Price discrimination is a rational strategy for a profit-maximizing monopolist when there is no opportunity for customers to engage in arbitrage across market segmentations

true or false

When regulating a monopoly with average cost pricing, the monopoly is able to enjoy a zero economic profit and the deadweight loss of an unregulated monopoly is eliminated.

true or false

Adam Ltd. sells product at a price of $1,200,000, including a one-year warranty guarantee that the product was free of defects. The cost of the product is $960,000 and the estimated cost to provide warranty service is $10,000, based on Adam Ltd. past practice on the warranty service. In addition, Adam Ltd. sold extended warranties related to the products for an extra charge of $16,000.

Required:

Explain how should the revenue be recognized with reference to HKFRS 15 “Revenue from Contracts with Customers”? Journal entries are not required for the above transaction.

1. Use the following information to complete the Revenue and asset test for industry segments:

1. Which of the operating segments would be considered reporting segments under the "revenue" test?

2. Which of the operating segments would be considered reporting segments under the "asset" test?

In this problem, assume that the distribution of differences is approximately normal. Note: For degrees of freedom d.f. not in the Student's t table, use the closest d.f. that is smaller. In some situations, this choice of d.f. may increase the P-value by a small amount and therefore produce a slightly more "conservative" answer.

Are America's top chief executive officers (CEOs) really worth all that money? One way to answer this question is to look at row B, the annual company percentage increase in revenue, versus row A, the CEO's annual percentage salary increase in that same company. Suppose a random sample of companies yielded the following data:

Do these data indicate that the population mean percentage increase in corporate revenue (row B) is different from the population mean percentage increase in CEO salary? Use a 5% level of significance. (Let d = B − A.)

(a) What is the level of significance?
State the null and alternate hypotheses.

(b) What sampling distribution will you use? What assumptions are you making?

What is the value of the sample test statistic? (Round your answer to three decimal places.)

(c) Find the P-value. (Round your answer to four decimal places.)

(d) Based on your answers in parts (a) to (c), will you reject or fail to reject the null hypothesis? Are the data statistically significant at level α?

(e) Interpret your conclusion in the context of the application.