Following are comparative balance sheets for Millco, Inc., at January 31 and Feb
ID: 2348121 • Letter: F
Question
Following are comparative balance sheets for Millco, Inc., at January 31 and February 28, 2011: MILLCO, INC. Balance Sheets February 28 and January 31, 2011 Assets February 28 January 31 Cash $ 42,000 $ 37,000 Accounts receivable 64,000 53,000 Merchandise inventory 81,000 94,000 Total current assets $ 187,000 $ 184,000 Plant and equipment: Production equipment 166,000 152,000 Less: Accumulated depreciation (24,000 ) (21,000) Total assets $ 329,000 $ 315,000 Liabilities Accounts payable $ 37,000 $ 41,000 Short-term debt 44,000 44,000 Other accrued liabilities 21,000 24,000 Total current liabilities $ 102,000 $ 109,000 Long-term debt 33,000 46,000 Total liabilities $ 135,000 $ 155,000 Owners' Equity Common stock, no par value, 40,000 shares authorized, 30,000 and 28,000 shares issued, respectively $ 104,000 $ 96,000 Retained earnings: Beginning balance $ 64,000 $ 43,000 Net income for month 36,000 29,000 Dividends (10,000 ) (8,000) Ending balance $ 90,000 $ 64,000 Total owners' equity $ 194,000 $ 160,000 Total liabilities and owners' equity $ 329,000 $ 315,000 Required: (a) Calculate the change that occurred in cash during the month. You may assume that the change in each balance sheet amount is due to a single event (for example, the change in the amount of production equipment is not the result of both a purchase and sale of equipment). (Hints: What is the purpose of the statement of cash flows? How is this purpose accomplished?) Because the retained earnings section of the balance sheet is, in and of itself, an analysis of the change in the retained earnings account for the month, the row for net income and dividends should be entered as the February amount and not the change. Use the space to the right of the January 31 data to enter the difference between the February 28 and January 31 amounts of each balance sheet item. (Negative amount should be indicated by a minus sign. Leave no cells blank - be certain to enter "0" wherever required.Omit the "$" sign in your response.) MILLCO, INC. Balance Sheets February 28 and January 31, 2011 Assets February 28 January 31 Change Cash $ 42,000 $ 37,000 Accounts receivable 64,000 53,000 Merchandise inventory 81,000 94,000 Total current assets $ 187,000 $ 184,000 Plant and Equipment: Production equipment 166,000 152,000 Less: Accumulated depreciation (24,000 ) (21,000 ) Total assets $ 329,000 $ 315,000 Liabilities: Accounts payable $ 37,000 $ 41,000 Short-term debt 44,000 44,000 Other accrued liabilities 21,000 24,000 Total current liabilities $ 102,000 $ 109,000 Long-term debt 33,000 46,000 Total liabilities $ 135,000 $ 155,000 Owners' Equity Common stock, no par value, 40,000 shares authorized, 30,000 and 28,000 shares issued, respectively $ 104,000 $ 96,000 Retained earnings: Beginning balance $ 64,000 $ 43,000 Net income for month 36,000 29,000 Dividends (10,000 ) (8,000 ) Ending balance $ 90,000 $ 64,000 Total owners' equity $ 194,000 $ 160,000 Total liabilities and owners' equity $ 329,000 $ 315,000 (b) Prepare a statement of cash flows that explains above changes? (Negative amount should be indicated by a minus sign.Omit the "$" sign in your response.) MILLCO, INC. Statement of Cash Flows For the Month Ended February 28, 2011 Cash flows from operating activities: Net income $ Add (deduct) items not affecting cash: Net cash by operating activities $ Cash flows from investing activities: Purchases of production equipment Cash flows from financing activities: $ Net cash flows by financing activities Net in cash for the year $Explanation / Answer
Millco Statement of Cash Flows Operations: Net Income $36,000 Additions: Depreciation Expense Not Using Cash $3,000 Decreased Merchandise Inventory $13,000 Subtractions: Decreased Accounts Receivable ($11,000) Decreased Accounts Payable ($4,000) Decreased Other Accrued Liabilities ($3,000) Cash Flow from Operations $34,000 Investing: Acquisition of Production Equipment ($14,000) Financing: Dividends Paid ($10,000) Proceeds from Common Stock Issued $8,000 Retirement of Long-Term Debt ($13,000) Cash Flow from Financing ($15,000) Net Change in Cash for Month $5,000 By preparing the statement of cash flows using the indirect method, we lose information contained within the detailed transactions. We only know the net effect. For example, production equipment and/or merchandise inventory could have been both purchased/manufactured and sold during the month, but we can only see the net effect of what could be multiple transactions. The statement of cash flows is important because cash is what allows a business to function. A firm can have plenty of income on its income statement but still wind up in financial difficulty if it lacks appropriate amounts of cash at the right times. Revenues and expenses on the income statement can differ from that period's cash receipts and disbursements because of two factors: accrual accounting and nonoperational sources of cash. Accrual accounting typically results in revenue recognition being separated from the actual receipt of cash, and expenses are treated likewise. Nonoperational sources and uses of cash do not contribute to the firm's income and expenses, but they can play a critical role if insufficient cash is available to meet obligations resulting from financing, such as debt repayment or an expected dividend. The operations section is important because successful companies are able to generate cash through their ongoing operations. The generation of additional cash beyond the expenses required to generate it is what allows the firm to pay dividends, invest in its business, and manage its indebtedness. Companies that fail to generate cash from operations over a significant period of time tend to wind up in financial distress and bankruptcy. This measure is particularly important, therefore, to both a firm's managers and its investors. The investing section shows whether or not a firm is growing and replacing equipment as it wears out. Investors are particularly interested in this to see if the company is investing in its business for growth or underinvesting, which will typically signal that growth opportunities are lacking and that the firm's ability to produce will eventually decline. The financing section is important because it tells investors whether or not the firm is diluting the value of their investment through the issuance of more stock or is increasing the firm's risk through the issuance of more debt. Conversely, share buybacks and the retirement of debt can serve to increase investors' confidence in the company. A firm that is generating most of its cash through financing activities is either likely to be in a high-growth stage or is likely to be in decline shortly. Whether the funds are being invested in plant and equipment, are being used for share buybacks and/or dividends, or are languishing as cash gives investors an idea of which scenario is most likely.