Statement of Cash Flows—Direct Method Peoria Corp. just completed another succes
ID: 2498099 • Letter: S
Question
Statement of Cash Flows—Direct Method
Peoria Corp. just completed another successful year, as indicated by the following income statement:
Presented here are comparative balance sheets:
Other information is as follows:
Dividends of $56,600 were declared and paid during the year.
Operating expenses include $50,560 of depreciation.
Land and plant and equipment were acquired for cash, and additional stock was issued for cash. Cash also was received from additional bank loans.
The president has asked you some questions about the year's results. She is very impressed with the profit margin of 17.8% (net income divided by sales revenue). She is bothered, however, by the decline in the company's cash balance during the year. One of the conditions of the existing bank loan is that the company maintain a minimum cash balance of $50,560.
Required:
Prepare a statement of cash flows for 2014 using the direct method in the Operating Activities section. Use the minus sign to indicate cash payments, cash outflows, or decreases in cash.
Peoria Corp.
Statement of Cash Flows
For the Year Ended December 31, 2014
Cash Flows from Operating Activities
$
Cash payments for:
$
Total cash payments
$
$
Cash Flows from Investing Activities
$
$
Cash Flows from Financing Activities
$
$
$
Cash balance, December 31, 2013
Cash balance, December 31, 2014
$
For the Year EndedDecember 31, 2014
Explanation / Answer
1. Changes in account balances and explanations
Net Change
Dr. (Cr.)
Explanation
Cash
-$37,370.00
Accounts receivable
$47,250.00
Inventory
$26,400.00
Prepayments
-$8,980.00
Land
$148,410.00
Purchase (c)
Plant and equipment
$200,590.00
Purchase (c)
Accumulated depreciation
-$50,560.00
Depreciation expense (b)
Accounts payable
$16,390.00
Other accrued liabilities
-$2,230.00
Income tax payable
$21,680.00
Long-term bank loan payable
-$46,300.00
Proceeds from bank loan (c)
Common stock
-$149,520.00
Issuance of common stock (c)
Retained earnings
-$165,760.00
$56,600 Dividends (a)
($222,360) Net income
Total
-
Conversion of income statement items to a cash basis
Income Statement
Amount
Adjustment
Cash Flows
Sales revenue
$1,249,080.00
$1,249,080.00
– Increase in accounts receivable
-$47,250.00
Cash collected
$1,201,830.00
Cost of goods sold
$701,460.00
$701,460.00
+ Increase in inventory
$26,400.00
+ Decrease in accounts payable
$16,390.00
Cash payments
$744,250.00
Operating expenses
$151,400.00
$151,400.00
– Decrease in prepayments
-$8,980.00
– Depreciation expense
-$50,560.00
– Increase in accrued liabilities
-$2,230.00
Cash payments
$89,630.00
Interest expense
$25,620.00
$25,620.00
No interest payable
$0.00
Cash payments
$25,620.00
Income tax expense
$148,240.00
$148,240.00
+ Decrease in income tax payable
$21,680.00
Cash paid for taxes
$169,920.00
Net income
$222,360.00
Net cash flow from operations
$172,410.00
Statement of cash flows:
PEORIA CORP.
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 2014
(IN THOUSANDS OF DOLLARS)
Cash Flows from Operating Activities
Cash collections from customers
$1,201,830.00
Cash payments for:
Inventory
-$744,250.00
Operating expenses
-$89,630.00
Interest
-$25,620.00
Income taxes
-$169,920.00
Total cash payments
-$1,029,420.00
Net cash provided by operating activities
$172,410.00
Cash Flows from Investing Activities
Acquisition of land
-$148,410.00
Acquisition of plant and equipment
-$200,590.00
Net cash used by investing activities
-$349,000.00
Cash Flows from Financing Activities
Additional long-term borrowings
$46,300.00
Issuance of common stock
$149,520.00
Cash dividends paid
-$56,600.00
Net cash provided by financing activities
$139,220.00
Net decrease in cash
-$37,370.00
Cash balance, December 31, 2006
$89,230.00
Cash balance, December 31, 2007
$51,860.00
2. Memorandum to the president:
TO: President of Peoria Corp.
FROM: Student’s name
DATE: January 20, 2015
SUBJECT: Cash flows
You recently expressed concern that in spite of the profitable year according to the income statement, cash decreased during 2014. Furthermore, there was a concern about the decrease in the company’s cash balance during 2014 to $51,860 at year-end, given that existing loan covenants require a $50,560 minimum balance at all times. My thoughts and a copy of the 2014 statement of cash flows follow.
Although net income on an accrual basis was $222,360, net cash flow from operating activities was only $172,410. One of the reasons is that cash collections were only $1,201,830 even though sales were $1,249,080. Also, inventory was increased by $26,400 during the period, and accounts payable was reduced by $16,390. Similarly, taxes payable was reduced by $21,680, resulting in a further drain on cash. Finally, two major acquisitions were made during the year: $200,590 was spent on new plant and equipment and another $148,410 to acquire new land. These were only partially offset by the sale of additional stock for $149,520 and the issuance of additional notes in the amount of $46,300. Finally, cash dividends amounted to $56,600, a further drain on cash.
Our cash flow should improve in future years without the need to invest so heavily in new property, plant, and equipment. We can also improve our operating cash flow by accelerating the collection of receivables as much as possible. Similarly, we should be able to reduce the amount of inventory on hand at any one time and over the long run reduce the cash paid for inventory purchases.
Net Change
Dr. (Cr.)
Explanation
Cash
-$37,370.00
Accounts receivable
$47,250.00
Inventory
$26,400.00
Prepayments
-$8,980.00
Land
$148,410.00
Purchase (c)
Plant and equipment
$200,590.00
Purchase (c)
Accumulated depreciation
-$50,560.00
Depreciation expense (b)
Accounts payable
$16,390.00
Other accrued liabilities
-$2,230.00
Income tax payable
$21,680.00
Long-term bank loan payable
-$46,300.00
Proceeds from bank loan (c)
Common stock
-$149,520.00
Issuance of common stock (c)
Retained earnings
-$165,760.00
$56,600 Dividends (a)
($222,360) Net income
Total
-
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