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Chapter 2: 7DQ (page 46)

Explain why the statement of cash flows provides useful information that goes beyond income statement and balance sheet data.

Short Answer

Expert verified

The cash flow statement exhibits information beyond the income statement and the balance sheet. Itprovides a reconciliation between the opening balance of the cash and cash equivalent and the closing balance of the cash and cash equivalent over the reporting period.

Step by step solution

01

Financial statements

Financial statements are described as the summary report of the organization鈥檚 financial position, performance, and cash flows. It is prepared by the management of the company at the end of the reporting period.

02

Cash flow statement

A cash flow statement is prepared by an organization to show the movement of cash in the company. It is a component of the financial statements of the company. It is a component of the financial statements of the company. It is prepared to reconcile the balance of the cash and cash equivalent, which is not possible to do from the income statement and balance sheet alone.

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Most popular questions from this chapter

Simpson Glove Company has made the following sales projections for the next six months. All sales are credit sales.

March

\(41,000

April

50,000

May

32,000

June

47,000

July

58,000

August

62,000

Sales in January and February were \)41,000 and $39,000, respectively. Experience has shown that of total sales receipts 10 percent are uncollectible, 40 percent are collected in the month of sale, 30 percent are collected in the following month, and 20 percent are collected two months after sale.

Prepare a monthly cash receipts schedule for the firm for March through

August.

What are the three primary sections of the statement of cash flows? In what section would the payment of a cash dividend be shown?

Sinclair Manufacturing and Boswell Brothers Inc. are both involved in the production of brick for the homebuilding industry. Their financial information is as follows:

Capital Structure

Sinclair

Boswell

Deb @11%

\(900,000

0

Common stock, \)10 per share

600,000

\(1,500,000

Total

\)1,500,000

\(1,500,000

Common shares

60,000

150,000

Operating plans

Sales (55,000 units at \)20 each)

\(1,100,000

\)1,100,000

Less: variable cost

880,000

(\(16 per unit)

550,000

(\)10 per unit)

Fixed cost

0

305,000

Earnings before interest and taxes (EBIT)

\(220,000

\)245,000

a. If you combine Sinclair鈥檚 capital structure with Boswell鈥檚 operating plan, what is the degree of combined leverage? (Round to two places to the right of the decimal point.)

The Denver Corporation has forecast the following sales for the first seven months of the year:

January

\(15,000

May

\)15,000

February

17,000

June

21,000

March

19,000

July

23,000

April

25,000

Monthly material purchases are set equal to 40 percent of forecast sales for the next month. Of the total material costs, 50 percent are paid in the month of purchase and 50 percent in the following month. Labor costs will run \(4,500 per month, and fixed overhead is \)4,500 per month. Interest payments on the debt will be $3,500 for both March and June. Finally, the Denver salesforce will receive a 3.00 percent commission on total sales for the first six months of the year, to be paid on June 30.

Prepare a monthly summary of cash payments for the six-month period from January through June. (Note: Compute prior December purchases to help get total material payments for January.)

DeSoto Tools Inc. is planning to expand production. The expansion will cost \(300,000, which can be financed either by bonds at an interest rate of 14 percent or by selling 10,000 shares of common stock at \)30 per share. The current income statement before expansion is as follows:

DeSOTO TOOLS, INC.

Sales

\(1,500,000

Less: Variable cost

\)450,000

Fixed cost

550,000

1,000,000

Earning before interest and taxes

\(500,000

Less: Interest expenses

100,000

Earning before taxes

\)400,000

Less: Taxes @34%

136,000

Earning after taxes

\(264,000

Shares

100,000

Earning per shares

\)2.64

After the expansion, sales are expected to increase by \(1,000,000. Variable costs will remain at 30 percent of sales, and fixed costs will increase to \)800,000. The tax rate is 34 percent.

c. Calculate the degree of operating leverage, the degree of financial leverage, and the degree of combined leverage, after expansion.
See all solutions

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