M7 Assignment Module 7: Amy's Fashions Ended The Year

M7 Assignmentmodule 7 Assignmentamys Fashions Ended The Year 2012 Wi

Using the indirect method, prepare the statement of cash flows for Amy's Fashions for the year ended 2012. Include sections for Cash Flows from Operating Activities, Investing Activities, and Financing Activities. Reconcile net income to net cash flows from operating activities, adjusting for non-cash items such as depreciation and amortization, gains and losses from sales of investments, and changes in current assets and liabilities. Calculate cash flows from investing activities by considering cash received from the sale of investments and land, as well as cash paid for construction of the building. Determine cash flows from financing activities by factoring in cash received from issuing a mortgage note payable and cash paid for dividends. Ensure the net increase or decrease in cash aligns with the change in cash balances from the beginning to the end of the year. Additionally, prepare a schedule of non-cash investing and financing activities, for example, issuing common stock to retire bonds payable.

Paper For Above instruction

The preparation of the statement of cash flows is an essential component of financial statement analysis, providing insights into a company's liquidity, solvency, and financial flexibility. Using the indirect method, which adjusts net income for changes in operational account balances and non-cash expenses, offers a comprehensive view of cash movement attributable to operating, investing, and financing activities.

Net Income as Starting Point

The net income for Amy's Fashions, as reported, is $98,500. This figure serves as the starting point for calculating cash flows from operating activities. Since net income is affected by non-cash expenses such as depreciation and amortization, these are added back to net income to reflect actual cash generated by operations.

Adjustments for Non-cash Items

Depreciation expense totals $23,500, and amortization of patents amounts to $7,000. Both are added back because they decrease net income but do not involve actual cash outflows. Conversely, gains from sale of investments totaling $11,000 are subtracted from net income, as they are non-operating gains that do not generate cash from core operations.

Changes in Working Capital

Analysis of current asset and liability accounts reveals changes affecting cash flows. For instance, if accounts receivable decrease, it indicates collections that increase cash, thus warranting an addition. Increase in inventory or prepaid expenses signifies cash outflows and are subtracted. The increase in accrued liabilities, such as accounts payable or accrued expenses, adds to cash flow, as these are funds the company has yet to pay. Conversely, an increase in income taxes payable indicates deferred payments, increasing cash flow. Accurately calculating these changes is critical for determining operating cash flow.

The formula to compute net cash flows from operating activities is: Net income + Depreciation + Amortization - Gains + Decreases in current assets + Increases in current liabilities - Increases in current assets - Decreases in current liabilities. Applying this to Amy's Fashions will provide the cash generated by core business operations.

Cash Flows from Investing Activities

The investing activities section reflects cash transactions related to assets such as investments, land, and property, plant, and equipment. The sale of investments and land generates cash inflows. Since land was sold at cost ($15,000), the cash received is equal to this amount. Cash paid for constructing the new building (costing $115,000) is an outflow, affecting the net cash flows from investing activities. The total cash received from investments and land sale minus cash paid for building construction yields net cash from investing activities.

Cash Flows from Financing Activities

Financing activities encompass cash inflows from issuing debt and equity, and outflows from paying dividends or settling liabilities. The issuance of a mortgage note for $40,000 provides cash inflow, while cash dividends declared ($74,000) partly paid reduce cash. As dividends paid are calculated as declared dividends minus increases in dividends payable, this affects cash flows accordingly. The net cash flow from financing activities is the difference between inflows from issuing debt or equity and outflows for dividends and debt payments.

By summing all sections—operating, investing, and financing cash flows—one determines the net change in cash for the year. Adding this change to the beginning cash balance provides the ending cash balance, which must match the cash balance reported on the balance sheet as of December 31, 2012.

Schedule of Non-Cash Investing and Financing Activities

This schedule highlights activities such as issuing common stock to retire bonds payable, which do not involve cash but reflect significant changes in the company's capital structure. As per the information, Amy's Fashions issued common stock to settle bonds at a value calculated by multiplying the number of shares issued (2,500) by the price per share ($40), resulting in a total of $100,000. This activity is recorded here to provide a complete picture of all corporate financing and investing changes, regardless of cash flow impact.

In conclusion, preparing the statement of cash flows using the indirect method involves detailed calculations and careful analysis of all financial statement components. The process provides valuable insights into how Amy's Fashions managed its cash during 2012, influencing decisions based on liquidity and operational efficiency. Accurate calculation and presentation of these statements facilitate transparency and better financial management practices.

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