Seminar Practice 5

Presenters : Sebastian, Shaya, Xinwei, Gordon

Jackson Publishing Inc, publishes 2 newspapers and, until recently, owned a baseball team. The team had been losing money for several years and was sold at end 2011 to a group of investors who plan to move the team. Also in 2011, JPI suffered an extraordinary loss when its Raytown printing plan was damaged by a tornado and has been repaired.
JACKSON PUBLISHING, INC. INCOME STATEMENT FOR THE YEAR ENDED DEC 31, 2011 Net Revenue $41,000,000 Cost and Expenses $36,500,000 Income from continuing operations $4,500,000 Discontinued operations: Operating loss on baseball team ($1,300,000) Gain on sale of baseball team $4,700,000 $3,400,000 Income before extraordinary items $7,900,000 Extraordinary Loss: Tornado damage to Raytown printing plant ($600,000) Net Income $7,300,000

What would JPIs net income have been for 2011 if it had not sold the baseball team?
-JPI did not sold off the baseball team so there will be no Gain on sale of baseball team in the income statement.
JACKSON PUBLISHING, INC. INCOME STATEMENT FOR THE YEAR ENDED DEC 31, 2011 Net Revenue Cost and Expenses Income from continuing operations Operating loss on baseball team Income before extraordinary items Extraordinary Loss: Tornado damage to Raytown printing plant Net Income $41,000,000 $36,500,000 $4,500,000 ($1,300,000) $3,200,000

($600,000) $2,600,000

Assume that in 2012, 7% increase in the profit of JPIs newspaper business but projected a $2,000,000 operating loss for the baseball team if JPI continued to operate the team. Forecast the amount of net income for 2012 if JPI still continue to own and operate the team.

For 2011, the income from continuing operations = $4,500,000

For 2012, the income due to 7% increase = (7% * $4,500,000) + $4,500,000 = $315,000 + $4,500,000 = $4,815,000

Also in 2012, No extraordinary loss as the repair was done in 2011 Projected operating loss for the team is $2,000,000 due to the team still in operation
JACKSON PUBLISHING, INC. INCOME STATEMENT FOR THE YEAR ENDED DEC 31, 2012 Net Revenue Cost and Expenses Income from continuing operations Operating loss on baseball team Income before extraordinary items Net Income $$$$$$ $$$$$$ $4,815,000 ($2,000,000) $2,815,000 $2,815,000

Given the assumptions in part b, but given that JPI did sell the baseball team in 2011, what will be estimated net income for 2012?
-No operating loss as the team is being sold - $0 -Income still maintain at 7% increase - $4,815,000
JACKSON PUBLISHING, INC. INCOME STATEMENT FOR THE YEAR ENDED DEC 31, 2012 Net Revenue Cost and Expenses Income from continuing operations Income before extraordinary items Net Income $$$$$$ $$$$$$ $4,815,000 $4,815,000 $4,815,000

Assume that the expenses of operating the team in 2011 amounted to $32,200,000, net of any related income tax effects. Whats was the teams net revenue for the year?
-Baseball team is still operating under JPI. -Operating expenses is $32,200,000.

Revenue Operating Expenses = Operating Income (Loss/Gain) Revenue - $32,200,000 = -$1,300,000 (Loss) Revenue = $32,200,000 - $1,300,000 Revenue = $30,900,000

The following transactions and events occurred during the year. Assuming that this company uses the indirect method to report cash provided by operating activities, indicate where each item would appear on its statement of cash flows by placing an X in the appropriate column. If there are more than one answer due to the consideration of FRS 7, indicate clearly in your answers.

Statement of Cash Flows Operating Activities Investing Activities Financing Activities Noncash Investing/ Financing Activities

a. Paid cash to purchase inventory b. Purchase land by issuing common stock (a single transaction) c. Accounts receivable decreased in the year. d. Sold equipment for cash, yielding a loss. e. Recorded depreciation expense. f. Income taxes payable increased in the year.

g. Declared and paid a cash dividend.

h. Accounts payable decreased in the year. i. Paid cash to settle bond payable. j. Prepaid expenses increased in the year.

* What? * Provides information about the cash receipts and cash

payments of the business entity during the accounting period.

* Companys ability to generate positive cash flows in the

future periods.

* Companys ability to meet its obligations and to pay dividends * Companys need for external financing * Reasons for differences between the net income and the
related net cash flows from operating activities.

* Both the cash and non-cash aspects of the companys

investment and financial transactions for the period.

* Causes of the change in the amount of cash and cash

equivalent between the beginning and the end of the accounting period.

* In the statement of cash flows, information about the cash

receipts and cash payments is classified in terms of companys operating activities, investing activities, and financing activities.

* shows the cash effects of revenue and expense transactions.

It also means it includes cash effects of those transactions reported in continuing operations section of income statements.

Inflows Receipts from customers Receipts from investments (Dividends received*) Receipts from investments (Interest received*)

Outflows Payments to suppliers Payments to employees

Payments to lenders (Interest paid*) Payments to government (Taxes paid*) Payments to shareholders (Dividends paid*)

* FRS 7: alternative method of classification

* Cash flows relating to investing activities present the cash

effects of transactions involving plan assets, intangible assets, and investments.
Inflows Sales of noncurrent assets Sales of marketable securities (equity & debt investments) Outflows Purchase noncurrent assets Purchase marketable securities (equity & debt investments)

Collect principal on notes receivable

Extend loans

* Cash flows relating to financial activities include items that

results from debt and equity financing transactions. It proceeds from a companys issuance of its own stock or bonds, borrowings under loans, and so forth.
Inflows Shares issuance Bonds placement Short-term and long-term borrowings from banks Outflows Purchase treasury stock Repay borrowings (principal)

* Some financial and investing activities occur without

consuming cash. These transactions do not entail a direct inflow or outflow of cash; they do pertain to significant investing and/or financing events.

Statement of Cash Flows Operating Activities Investing Activities Financing Activities Noncash Investing/ Financing Activities

a. Paid cash to purchase inventory b. Purchase land by issuing common stock (a single transaction) c. Accounts receivable decreased in the year. d. Sold equipment for cash, yielding a loss. e. Recorded depreciation expense. f. Income taxes payable increased in the year.

g. Declared and paid a cash dividend.

h. Accounts payable decreased in the year. i. Paid cash to settle bond payable. j. Prepaid expenses increased in the year.

*
a. Paid cash to purchase inventory. This falls under cash paid to purchase merchandise, which is cash paid to suppliers. Hence it falls under operating activities. b. Purchase land by issuing common stock ( a single transaction) This falls under the non-cash investing, where a company exchanges common stock for land which does not entail a direct inflow or outflow of cash.

*
c. Accounts receivable decreased in a year

*It falls under cash received from customers; hence it is cash

flows from operating activities. When the accounts receivable decrease from customers, we add the decrease in accounts receivable to the net sales to determine the amount of cash received during the year. The collection of account receivables exceeds the credit sales.

*
d. Sold equipment for cash, yielding a loss *It falls under cash flow from operating activities in accordance to the indirect method. Loss on sale of plant assets. e. Recorded depreciation expense *It falls under cash flow from operating activities in accordance to the indirect method. Depreciation from non cash items.

*
f. Income taxes payable increased in a year *It falls under operating activities according to FRS method of classifications. g. Declared and paid a cash dividend *It falls under operating activities according to FRS method of classifications. It could also fall under cash flows from financing activities as it involves debit and credit changes during the period of liability and stockholders equity accounts.

*
h. Account payable decreased in a year.

*It falls under cash paid for purchase of merchandise; hence it

is cash flows from operating activities.
I. Paid cash to settle bond payable.

*It falls under cash flow from financing activities, as it involves

equity financing transactions.

j. Prepaid expenses increased in a year

*It falls under cash payments for expenses; hence it falls under
cash outflows from operating activities.

Statement of Cash Flows Operating Investing Activities Activities

Financing Activities

Noncash Investing/ Financing Activities

a. Paid cash to purchase inventory b. Purchase land by issuing common stock (a single transaction) c. Accounts receivable decreased in the year. d. Sold equipment for cash, yielding a loss.

X X X X(indirect) X(indirect) X(FRS) X(FRS) X X X(cash

proceed)

e. Recorded depreciation expense.

f. Income taxes payable increased in the year. g. Declared and paid a cash dividend. h. Accounts payable decreased in the year. i. Paid cash to settle bond payable. j. Prepaid expenses increased in the year.

X
X

Question 3
Wofford Company provides the following information related to its investing and financing activities for the current year:

Cash receipts: Sale of common stock $250,000 Sale of equipment (at $34,000 loss) $156,000 Sale of land (at $50,000 gain) $160,000
Cash payments: Purchase of equipment $178,000 Purchase of treasury stock ... $ 45,000 Retirement of debt . $ 36,500 Dividends on preferred and common stock . $ 75,000

a. Calculate the net amount of cash provided by or used for investing activities for the year.

Investing activities are: Sale of equipment (at $34,000 loss) Sale of land (at $50,000 gain) Purchase of equipment

$156,000 (+) $160,000 (+) $178,000 (-)

Net amount of cash used for or provided by investing activities = 156,000 + 160,000 178,000 = $ 138, 000

b. What impact, if any, do the following facts have on your calculation? (1) Equipment was sold at a loss, and (2) land was sold at a gain.
It does not have any impact on the calculation for the investing activities as the gain and losses of the sales are to be recorded in the operating activities

c. Briefly explain your decision to exclude any of the items listed above if they were not included in your calculation in part a.
The below items belongs in financing activities therefore are not included in the calculation of part a:

Sales of common stock Purchase of treasury stock Retirement of debt Dividends on preferred and common stocks

Question 4
Shepherd Industries had the following cash flows by major categories during the current year:
Cash provided by: Receipts from customer Sale of bonds Sale of treasury stock . Interest and dividends received . Sale of equipment (at a $56,000 loss) .. Cash used for: Payments to employees Payments to purchase inventory. Dividends on common stock. Purchase of treasury stock ... Interest expense .. $560,000 $400,000 $ 34,000 $ 56,000 $236,000 $135,000 $190,000 $ 60,000 $ 20,000 $ 78,000

a. Calculate the net amount of cash provided by or used for financing activities for the year.
Financing activities are: Sale of bonds Sale of treasury stocks Dividends on common stock Purchase of treasury stock

$400,000 $ 34,000 $ 60,000 $ 20,000

(+) (+) (-) (-)

Net amount of cash used for or provided by financing activities = 400,000 + 34,000 60,000 20,000 = $354,000

Statement of Cash Flows (Q3 S1 2010-11) The following selected balance sheet and income statement data and additional information for Kings & Co. are presented below. Additional information: (1) The only items affecting retained earnings in 2010 were net income and dividends declared and paid. (2) Equipment with a cost of $30,000 and an accumulated depreciation of $12,000 was sold for $22,000 during 2010.

(a) Prepare the operating activities section of a statement of cash flows for Kings & Co. for 2010 using the indirect method and in accordance with FRS 7. Indirect method Explain why the net cash flows from operating activities differ from another measurement of performance- net income
Cash flows arising from taxes on income shall be separately disclosed and shall be classified as cash flows from operating activities unless they can be specifically identified with financing and investing activities. Cash flows from interest and dividends received and paid shall each be disclosed separately. Each shall be classified in a consistent manner from period to period as either operating, investing or financing activities. Source: http://www.asc.gov.sg/frs/frsEffective01012013.htm

FRS 7

(a) Prepare the operating activities section of a statement of cash flows for Kings & Co. for 2010 using the indirect method and in accordance with FRS 7.
King & Co. Statement of cash flows for the year ended Dec 31, 2010 $ Cash flow from operating activies: Pre-tax income (1) Gain or losses relating to non-operating activities Gain on sale of equipment (2) Non cash items Depreciation (3) changes in working capital Decrease in accounts receivable Increase in inventories Decrease in accounts payable (4) Items that require separate disclosure per FRS7 Dividend paid Income tax paid Cash flow from operating activies: 62,000 -4000 8000 30,000 -6000 -32,000 -20,000 -5000 33,000

(a) Prepare the operating activities section of a statement of cash flows for Kings & Co. for 2010 using the indirect method and in accordance with FRS 7.
King & Co. Statement of cash flows for the year ended Dec 31, 2010 $ Cash flow from operating activies: Pre-tax income (1) Gain or losses relating to non-operating activities Gain on sale of equipment (2) Non cash items Depreciation Book value of equipment= Cost accumulated (3) changes in working capital = $30,000 - $12,000 Decrease in accounts receivable Increase in inventories = $18,000 Decrease in accounts payable Equipment sold for $22,000 (4) Items that require separate disclosure per FRS7 Hence,Dividend Gain on sale of equipment= $22,000 paid = $4000 Income tax paid Cash flow from operating activies: 62,000 -4000 8000 depreciation 30,000 -6000 -32,000

$18,000

-20,000 -5000 33,000

(a)Cash Prepare operating flow fromthe operating activies: activities section of a statement of Pre-tax 62,000 cash flows for income Kings & Co. for 2010 using the indirect method (1) in Gain or losses relating with to non-operating and accordance FRS 7. activities
Gain on sale of equipment (2) Non cash items Depreciation (3) changes in working capital Decrease in accounts receivable Increase in inventories Decrease in accounts payable (4) Items that require separate disclosure per FRS7 Dividend paid Decrease in account receivable Income tax paid Cash flow from operating activies: 8000

-4000

30,000 -6000 -32,000 -20,000 -5000 33,000

2010 Jan-01 Bal bld

Accounts receivable $ 2010 150,000 Dec-31 Cash Dec-31 Bal c/d 150,000 120,000

$ 30,000 120,000 150,000

2011 Jan-01 Bal b/d

Pre-tax income 62,000 (a) Prepare the operating activities section of a statement of (1) Gain or losses relating to non-operating activities cash flows for Kings & Co. for 2010 using the indirect method Gain on sale of equipment -4000 and in accordance with FRS 7. (2) Non cash items Depreciation (3) changes in working capital Decrease in accounts receivable Increase in inventories Decrease in accounts payable (4) Items that require separate disclosure per FRS7 Dividend paid Income tax paid Increase in inventories Cash flow from operating activies: 8000 30,000 -6000 -32,000 -20,000 -5000 33,000

2010 Jan-01 Bal bld Dec-31 cash 2011 Jan-01 Bal b/d

Inventories account $ 2010 50,000 6000 Dec-31 Bal c/d 56,000 56,000

$ 56,000 56,000

Pre-tax income 62,000 (a) Prepare the operating activities section of a statement of (1) Gain or losses relating to non-operating activities cash flows for Kings & Co. for 2010 using the indirect method Gain on sale of equipment -4000 and in accordance with FRS 7. (2) Non cash items Depreciation (3) changes in working capital Decrease in accounts receivable Increase in inventories Decrease in accounts payable (4) Items that require separate disclosure per FRS7 Dividend paid Income tax paid Decrease in operating accounts Cash flow from activies: 8000 30,000 -6000 -32,000 -20,000 -5000 33,000

payable

2010 Dec-31 cash Dec-31 Bal c/d

Accounts payable $ 2010 32,000 Jan-01 Bal bld 38,000 70,000 2011 Jan-01 Bal bld

$ 70,000 70,000 38,000

(a) Prepare the operating activities section of a statement of (3) changes in working capital cash flows for in Kings & receivable Co. for 2010 using the indirect method Decrease accounts 30,000 Increase in inventories -6000 and in accordance with FRS 7.
Decrease in accounts payable (4) Items that require separate disclosure per FRS7 Dividend paid Income tax paid Cash flow from operating activies: -32,000 -20,000 -5000 33,000

Depreciation

8000

Dividend paid
Retained earnings, Jan 1 Add: Net income Less: Dividends Retained earning, Dec 31 $40,000 $62,000- $6000= $56000 ? 76,000

Dividends declared and paid= $40,000+ $56,000 -$76,000 = $20,000

(a) Prepare the operating activities section of a statement of (3) changes in working capital cash flows for in Kings & receivable Co. for 2010 using the indirect method Decrease accounts 30,000 Increase in inventories -6000 and in accordance with FRS 7.
Decrease in accounts payable (4) Items that require separate disclosure per FRS7 Dividend paid Income tax paid Cash flow from operating activies: -32,000 -20,000 -5000 33,000

Depreciation

8000

Income tax paid

2010 Dec-31 cash Dec-31 Bal c/d Tax payable $ 2010 5,000 Jan-01 Bal bld 3,000 Dec-31 tax expense 8,000 2011 Jan-01 Bal bld $ 2,000 6,000 8,000 3,000

(b) Management of Kings & Co. is exploring ways to increase the cash flows from operations. Describe three ways that cash flows from operations could be increased. 1. The management could increase the collection of account receivables. 2. Keep inventory low so that cash will not be held up in inventory 3. Delay payment of liabilities so that not all cash will go towards payment of account payable