Informationbus Fp3061 Fundamentals Of Accounting Assessment

Informationbus Fp3061 Fundamentals Of Accountingassessment 3 Part 2

Using the information from the worksheet, prepare the cash flow statement on the next worksheet. Skylar Enterprises, Inc. has provided comparative balance sheets for assets and liabilities/equities, along with additional information about net income, dividends, bond redemption, stock issuance, land sale, and equipment transaction. The task involves analyzing this data to classify cash inflows and outflows into operating, investing, and financing activities, and then preparing an indirect method cash flow statement for the year ended December 31, 2012.

Paper For Above instruction

Introduction

The preparation of a cash flow statement is an essential aspect of financial analysis, providing insights into a company's liquidity, financial flexibility, and overall financial health. The cash flow statement complements the balance sheet and income statement by showcasing actual cash inflows and outflows during a specific period. In this paper, we analyze the financial data of Skylar Enterprises, Inc., for the year ending December 31, 2012, to classify cash flows as operating, investing, or financing, and then construct a detailed cash flow statement based on the indirect method.

Financial Data Analysis

Skylar Enterprises' comparative balance sheets reveal significant changes in assets, liabilities, and equities over the year. Notable adjustments include a substantial increase in cash, a decrease in land and bonds payable, and an increase in common stock and retained earnings. The additional information indicates net income of $103,000, dividends paid of $45,000, bond redemption of $55,000, and issuance of common stock for $42,000. These figures are fundamental in determining cash flows from various activities.

Classifying Cash Flows

Classifying each cash flow involves understanding the nature of transactions:

  • Operating activities includes cash receipts from sales and cash payments for expenses and taxes.
  • Investing activities involves the purchase or sale of long-term assets like land and equipment.
  • Financing activities encompass transactions related to debt and equity, such as issuing stock, borrowing, or repaying debt.

Each transaction is examined to determine its appropriate category.

Cash Flows from Operating Activities

Starting with net income of $103,000, adjustments are made for non-cash items like depreciation and changes in working capital. The key changes include a decrease in accounts receivable of $9,000, a decrease in accounts payable of $8,000, and an increase in inventory of $19,000. The net effect of these adjustments results in cash flows from operating activities. Additionally, cash paid for taxes and expenses, and interest are incorporated, aligning with the indirect method's approach.

Cash Flows from Investing Activities

The sale of land at cost generates cash inflow, while the purchase of equipment signifies an outflow. Since no equipment was sold besides land, and other investments are unaffected, the net cash flow from investing activities is calculated by summing these cash transactions. The significant cash inflow from land sale and outflow for equipment purchase are reflected here.

Cash Flows from Financing Activities

Issuance of common stock for $42,000, redemption of bonds for $55,000, and payment of dividends of $45,000 are key financing activities. The net effect, combined with repayment of bonds, reflects how the company financed its operations and growth. The cash inflow from stock issuance offsets bond redemption and dividends paid, providing a comprehensive view of financing activities during 2012.

Constructing the Cash Flow Statement

Following the indirect method, the cash flow statement starts with net income, then adjusts for non-cash items and working capital changes to arrive at cash flows from operating activities. Next, cash flows from investing and financing activities are incorporated, resulting in the net increase or decrease in cash during the period. The final cash balance reconciles with the beginning cash balance, confirming the accuracy of classification and calculations.

Conclusion

The cash flow statement portrays a detailed picture of Skylar Enterprises' cash management during 2012. The net inflows and outflows across operating, investing, and financing activities highlight the company’s strategies for growth, liquidity, and financial stability. Proper classification and analysis of these cash flows are crucial for stakeholders to assess the company's operational efficiency and financial health. This exercise demonstrates the importance of accurate data analysis and comprehensive understanding of cash flow components in financial reporting.

References

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  • White, G. I., Sondhi, A. C., & Fried, D. (2003). The Analysis and Use of Financial Statements. Wiley.
  • Penman, S. H. (2012). Financial Statement Analysis and Security Valuation. McGraw-Hill/Irwin.
  • Schroeder, R. G., Clark, M. W., & Cathey, J. M. (2011). Financial Accounting Theory and Analysis. Wiley.
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  • Ross, S. A., Westerfield, R. W., & Jaffe, J. (2013). Corporate Finance. McGraw-Hill Education.

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