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Solution for Financial Accounting: The Impact on Decision Makers 7th Edition Chapter 12, Problem 1

by Gary A. Porter, Curtis L. Norton
315 Solutions 13 Chapters 29312 Studied ISBN: 9781439080528 Finance 5 (2)

Chapter 12, Problem PA 1 : 1.1.In-class discussion: Differences between income and cash flows—Julian...

1.1.In-class discussion: Differences between income and cash flows—Julian Corporation

Refer to the income statement (Exhibit 12-8) and the statement of cash flows (Exhibit 12-14 & 15) for Julian Corporation in the text.

Did Julian have positive or negative cash flow from operations? Did Julian have operating income or an operating loss? Should these be the same? Why or why not?

Which nonoperating items were the primary users of cash? Are these nonoperating items likely to be repeated in future periods? Why or why not?

Which item was the principal contributor to the difference between net income and net cash provided by operating activities? Is this item likely to be repeated in future periods? Why or why not?

What was the chief source of cash from financing activities? From investing activities?

How was capital investments paid for?

 

Step-By-Step Solution

1.1.Solution

Julian had positive cash flow from operating activities of $174,000. The income statement showed operating income of $120,000. These are not required to be the same because the income statement is an accrual statement, and the statement of cash flows is a cash basis statement. Many accrual expenses do not use cash, and some accrual revenues do not provide cash in the same period.

Cash was used to purchase fixed assets for $75,000, and paid cash dividends of $67,000. This is a normal occurrence for a going concern. Retirement of debt used $$63,000 cash. The retirement of some debt can be expected to occur routinely. However, it should be noted that this amount is partially balanced by cash inflow of $25,000 from the issue of new stock.

Net income included depreciation expense of $40,000, which required no cash and was added back on the statement of cash flows. This will be repeated in future periods – as long as the company has fixed assets.

The chief source of cash from financing activities was the issue of new stock. The sale of machinery provided the primary cash inflow from investing activities.

This question is intended to focus students’ attention on the fact that operations are the chief source of cash for new machinery, investments, and debt repayments.

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