AOMEWORK CHAPTER 12 Statement of Cash Flows: Indirect Method The comparative bal

Question

AOMEWORK CHAPTER 12 Statement of Cash Flows: Indirect Method The comparative balance sheets for McGill Manufacturing, Inc., for June 30, 2014 and 2013 follow. Additional information about McGill's operations during 2014 is as follows: (a) net income, $239,200; (b) depreciation expense of S120,000; (c) equipment that cost $48,000 with accumulated depreciation of S34,000 sold at a loss of $8,000; (d) it also pu through an increase of $200,000 in Mortgage Payable; (e) made a S40,000 payment on the mortgage; (f) repaid $160,000 in notes but borrowed an $60,000 additional through the issuance of a new note payable; (g) declared & paid a $120,000 cash dividend. rchased land&building; for $200,000 REQUIRED 1. Using the indirect method, prepare a statement of cash flows for McGill 2. ACCOUNTING CONNECTION What are the primary reasons for McGill's large increase in cash from 2013 to 2014? 3. Compute and assess cash flow yield & free cash flow for 2014. (Note: Round cash flow yield to one decimal place.) How would you assess McGill's cash generating ability?

Explanation / Answer

1) McGill Manufacturing, Inc.

Statement of Cash Flows

For the Year Ended June 30, 2014 (Amounts in $)

2) Primary Reasons for the increase in cash include:

Cash flows from operating activities Net Income 239,200 Adjustments to reconcile net income to net cash flows from operating activities Add: Depreciation Expense 120,000 Add: Loss on sale of equipment 8,000 Changes in current assets and current liabilities Add: Decrease in Accounts Receivable 40,000 Add: Decrease in Merchandise Inventory 80,000 Add: Decrease in Prepaid Expenses 800 Add: Increase in Accounts Payable 44,000 Less: Decrease in Notes Payable (Current) (100,000) Add: Increase in Income Taxes Payable 16,000 208,800 Net cash flows from operating activities (A) 448,000 Cash flows from investing activities Sale of Equipment [($48,000-$34,000) - $8,000 loss on sale] 6,000 Net cash flows from investing activities (B) 6,000 Cash flows from financing activities Payment of Mortgage (40,000) Payment of Dividend (120,000) Net cash used in financing activities (C) (160,000) Net increase (decrease) in cash (A+B+C) 294,000 Add: Cash at beginning of year 40,000 Cash at end of year 334,000

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