Shown below are comparative balance sheets for Padgett Company PADGETT COMPANY C

Question

Shown below are comparative balance sheets for Padgett Company PADGETT COMPANY Comparative Balance Sheet 31-Dec Asssets 2012 2011 Cash 68,000 22,000 Accounts Receivable 88,000 76,000 Inventory 167,000 189,000 Land 80,000 100,000 Equipment 260,000 200,000 Accumulated Depr.-Equipment -66,000 -32,000 Total 597,000 555,000 Liabilities and Stockholders' Equity Accounts payable 39,000 43,000 Bonds payable 150,000 200,000 Common stock ($1 par) 216,000 174,000 Retained earnings 192,000 138,000 Total 597,000 555,000 Additonal Information: 1. Net income for 2012 was $93,000 2. Depreciation expense was $34,000 3. Cash dividends of $39,000 were declared and paid. 4. Bonds payable amounting to $50,000 were declared and paid. 5. Common stock was issued for $42,000 cash 6. No equipment was sold during 2012 7. Land was sold for its book value a) Prepare a statement of cash flows for 2012 using the indirect method b) Computer these cash-based ratios. (1) Current cash debt coverage. (2) Cash debt coverage.

Explanation / Answer

Calculating Cash flow from Operations
Here are the steps for calculating the cash flow from operations using the indirect method:

Start with net income.
Add back non-cash expenses.
(Such as depreciation and amortization)
Adjust for gains and losses on sales on assets.
Add back losses
Subtract out gains
Account for changes in all non-cash current assets.
Account for changes in all current assets and liabilities except notes payable and dividends payable.

In general, candidates should utilize the following rules:
Increase in assets = use of cash (-)
Decrease in assets = source of cash (+)
Increase in liability or capital = source of cash (+)
Decrease in liability or capital = use of cash (-)

Cash Flow from Investment Activities
Cash Flow from investing activities includes purchasing and selling long-term assets and marketable securities (other than cash equivalents), as well as making and collecting on loans.
Cash Flow from Financing Activities
Cash Flow from financing activities includes issuing and buying back capital stock, as well as borrowing and repaying loans on a short- or long-term basis (issuing bonds and notes). Dividends paid are also included in this category, but the repayment of accounts payable or accrued liabilities is not.

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