Financial Concepts

Income and Cash Flow Exercise

Homework Exercise 4

1.  Calculate Earned Revenues

Big Blue University has a fiscal year that ends on June 30. 2009 Summer Session of the university runs seven weeks from June 9 through July 28. Total tuition paid by students for the summer session amount to $1.4 million.

a.  How much revenue should be reflected in fiscal year ended June 30, 2009? Explain your answer (Hint: Calculate the number of weeks or days & the proportion before June 30)

b.  Would your answer to Part A be any different if the university had a tuition refund policy that no tuition would be refunded after the end of the third week of the summer session classes? Explain your answer.

2.  Calculate Operating Income and Net Income

The following information is available from the accounting records of Monofill Inc. the year ended December 31, 2009:

Net cash provided by financing activities / $127,000
Dividends paid / 28,000
Extraordinary loss from flood, net of tax savings of $35,000 / 135,000
Income tax expense / 16,000
Depreciation / 31,000
Interest Expense / 12,500
Net sales / 864,000
Advertising expense / 25,000
Accounts receivable / 77,000
Cost of goods sold / 559,000
General and administrative expenses / 183,000

a.  Calculate the operating income for the company

b.  Calculate the company’s net income for the year

3.  Cash flows from operating, investing and financing activities – direct method

The following information is available from Moonvessel Co.’s accounting records of the year ended December 31, 2009 (amounts in millions):

Cash dividends declared and paid / $340
Interest and taxes paid / 110
Collections from customers / 1,530
Net Income / 120
Repayment of long-term debt / 320
Purchase of land and buildings / 70
Cash paid to suppliers and employees / 1230
Depreciation / 70
Issuance of common stock / 400
Purchase of new delivery trucks / 80

a.  Calculate the net cash provided (used) by operating activities for the company for the year

b.  Calculate the net cash provided [used] by investing activities

c.  Calculate the net cash provided (used) by financing activities

d.  Calculate the net increase (decrease) in cash for the year

4.  Operating income versus net income

If you were interested in evaluating the profitability of a company and could have only limited historical data, which you prefer to know the company’s operating income or net income for the past 5 years? Explain your answer.

5.  Accrual to cash flows

For each of the following items, calculate the cash and sources for cash uses that should be recognized on the statement of cash flows for Baldwin Co. for the year ended Dec. 31, 2009.

a.  Sales on account (all are collectible) amounted to $760,000, and accounts receivable decreased by $24,000. How much cash was collected from customers?

b.  Income tax expense for the year was $148,000.00, and income taxes payable decreased by $34,000, how much cash was paid for income taxes?

c.  Cost of goods sold amounted to $408,000, accounts payable increased by $19,000, and inventories increased by $14,000. How much cash was paid to suppliers?

d.  The net book value of buildings increased by $240,000. No buildings were sold, and depreciation expense for the year was $190,000. How much cash was paid to purchase the buildings?

4. Circle-Square Ltd is in the process of liquidating and going out of business. When a company liquidates it sells all of its assets, realizing whatever cash it can, and pays off its liabilities. Any difference between the book value of the asset (or liability) and the amount of cash received (or paid) is recorded as a gain or loss which is reflected in the Owners’ Equity account.

At the date the firm decides to liquidate, its Balance Sheet shows $22,800 in cash, $114,200 in Accounts Receivable, $61,400 in Inventory, $265,000 in Plant & Equipment, and Total Liabilities of $305,600.

It is estimated that:

1)  the inventory can be disposed of in a liquidation sale for 80% of its cost.

2)  all but 5 % of the accounts receivable can be collected

3)  plant and equipment can be sold for $190,000.

4)  liabilities must be paid off in total.