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Analyzing the financial statements of SFCC Corporation, Inc., for the years ending December 31, 2012 and 2011, involves assessing cash flows and financial activities. The primary tasks include calculating specific cash-related activities, preparing the statement of cash flows using both indirect and direct methods, and commenting on the differences between these methods.

Paper For Above instruction

The detailed analysis of SFCC Corporation’s financial statements provides valuable insights into the company’s cash flow activities during 2012. The primary focus in this exercise involves understanding how cash was generated or used through operating, investing, and financing activities, as well as the comparative financial changes over the two periods.

Cash Received from Issuance of Bonds Payable

According to the balance sheet, bonds payable increased from $8,370,000 in 2011 to $11,236,000 in 2012. The increase is $2,866,000. Since the note specifies that SFCC purchased land of $83,000 by financing it entirely with bonds payable, the total increase in bonds likely comprises both the amount used to finance land purchase and additional bond issuance. Therefore, the cash received from bonds payable issuance can be calculated as the increase in bonds payable ($2,866,000) plus the cash used for the land purchase ($83,000), totaling $2,949,000.

Equipment Purchased in 2012

To determine equipment purchases, we analyze the net change in equipment and depreciation expense. Equipment (net of depreciation) increased from $10,121,000 in 2011 to $13,889,000 in 2012, indicating a gross increase before depreciation. Given depreciation expense of $1,010,000 during 2012, equipment purchases can be estimated as the net increase plus depreciation expense: ($13,889,000 - $10,121,000) + $1,010,000 = $3,768,000 + $1,010,000 = $4,778,000. This figure represents the total equipment acquired during 2012.

Dividends Paid

The change in retained earnings from 2011 ($7,637,000) to 2012 ($8,676,300) is an increase of $1,039,300. Since net income for 2012 was $1,270,000, dividends paid can be calculated as the difference: $1,270,000 - $1,039,300 = $230,700. This matches the typical pattern where dividends decrease retained earnings, so the dividends paid during 2012 are approximately $230,700.

Cash Exchanged for Land Purchase

The purchase of land costing $83,000 was financed completely by bonds payable; thus, the cash outlay for the land purchase was $83,000 financed by debt. Since the bonds payable increased by $2,866,000, and the land purchase was fully financed by bonds, the actual cash exchanged in this activity was $83,000—the land cost—though the cash impact in financing activities reflected in bonds increased accordingly.

Preparation of Statement of Cash Flows (Indirect Method)

The indirect method begins with net income and adjusts for changes in working capital and non-cash expenses. Starting with net income of $1,270,000, adjustments include adding depreciation expense ($1,010,000), decrease in accounts receivable (from $6,230,000 in 2011 to $7,202,000 in 2012, indicating a decrease of $972,000), increases in inventories ($7,316,000 vs. $6,786,000), increases in accounts payable ($10,782,000 vs. $10,038,000), and other current liabilities. The net cash provided by operating activities is derived after these adjustments, as well as considering cash flows from investing (equipment and land) and financing activities (bond issuance, dividends).

Preparation of Operating Activities (Direct Method)

The direct method reports cash received from customers and cash paid to suppliers and employees. Cash collections from customers are based on sales adjusted for changes in accounts receivable. The cash paid for goods and services involves cost of goods sold adjusted for inventory changes, salary expenses adjusted for accrued expenses, and other operational costs. This method provides a clearer view of actual cash flows from operations by directly listing cash receipts and payments.

Comparison of Indirect and Direct Methods

The indirect method is more commonly used because it focuses on reconciling net income to net cash flow from operating activities, utilizing readily available information from the income statement and balance sheet. However, it can be less transparent about actual cash flows. Conversely, the direct method provides more detailed insights into specific cash transactions, making it more informative for understanding cash management but often requires more extensive data collection. Both methods should produce the same net cash flow from operating activities, but differences in presentation can influence stakeholders' understanding of a company’s liquidity position.

Conclusion

In summary, the analysis of SFCC Corporation's financial statements highlights the significance of effective cash flow management and demonstrates the contrasting approaches of the indirect and direct methods in preparing the statement of cash flows. The indirect method, while easier to implement using existing financial statements, provides valuable reconciliation information. Meanwhile, the direct method offers granular cash flow details, beneficial for internal management and stakeholders tracking cash movements. Both approaches are indispensable for a comprehensive understanding of the company's liquidity and financial health.

References

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