Homework #3 _ Coursera Corrected

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Homework #3

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1. 

Which of the following would be a cash Δow from operating activities? (check all that apply)

Correct Response 

Purchases of equipment are an investing cash Δow.

Incorrect Response 

Operating cash Δow.

Incorrect Response 

Loss on sale of equipment is a cash Δow from investing activities.

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Purchases of equipment

Collections from customers

Incorrect Response 

Amortization of a patent is a noncash transaction, so it would not be a cash Δow.

Correct Response 

Operating cash Δow.

Amortization of a patent

Payments for salaries and wages

2. 

Which of the following would be a cash Δow from Δnancing activities? (check all that apply)

Correct Response 

Payments to suppliers are operating cash Δows.

Incorrect Response 

Payments to acquire a company are investing cash Δows.

Correct Response 

Cash Δow from Δnancing activities.

Incorrect Response 

Proceeds from selling equipment are investing cash Δows.

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Payments to suppliers

Payments to acquire a company

Proceeds from issuing stock

Correct Response 

Cash Δow from Δnancing activities.

Repayments of principal portion of debt

3. 

A company has the following cash Δows: Cash from operations 10

Cash from investing activities (1) Cash from Δnancing activities (9)

Which growth stage best describes this pattern of cash Δows?

Correct Response 

This pattern is typical for a company in decline. The company still has a positive cash from operations, but is investing very little in long-term assets, indicating that it doesn't have many new opportunities. The company uses its excess free cash Δow to pay dividends, pay down debt, or buy back equity, which leads to a negative Δnancing cash Δow.

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4. 

A company bought $50,000 of inventory for $20,000 cash, with the balance due to the supplier in 30 days. What is the operating cash Δow in this transaction?

Correct Response 

You can think of this as two transactions. First, the company bought $20,000 of inventory with cash. This is an operating cash Δow. Second, the company bought $30,000 of inventory on account. This is a non-cash transaction. So, the operating cash Δow is ($20,000).

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5. 

Which of the following would be shown as a negative number in the Operating section of the SCF under the indirect method? (check all that apply)

Incorrect Response 

Capital expenditures are an investing activity.

Incorrect Response 

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Capital expenditures

A decrease in Accounts Receivable would be added back (decrease in a noncash asset = increase in cash on the balance sheet equation).

Correct Response 

A decrease in Accounts Payable would be subtracted (decrease in liability = decrease in cash on the balance sheet equation).

Incorrect Response 

Depreciation is added back to Net Income under the indirect method, so it would be a positive number.

Correct Response 

Gain on sale of equipment would be subtracted from Net Income under the indirect method (it increased net income but must be subtracted out because it is not operating, but

investing).

Decrease in Accounts Payable

Depreciation on a building

Gain on sale of equipment

6. 

A company has Net Income of $10, which included $2 of depreciation expense. There were no other noncash expenses in Net Income and there were no gains or losses. Accounts receivable was $20 at the beginning of the year and $25 at the end of the year. Accounts Payable was $15 at the beginning of the year and $5 at the end of the year. Inventory was $12 at the beginning of the year and $7 at the end of the year. All other balance sheet accounts were unchanged over the year. What was the company’s Cash Flow from Operating Activities?

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Incorrect Response 

Let’s do the indirect method! Start with Net Income of $10. Add back $2 of Depreciation Expense. Subtract the increase in A/R of $5. Subtract the decrease in A/P of $10. Add the decrease in Inventory of $5. The answer is $10 + $2 – $5 – $10 + $5 = $2.

$2 $12 ($2)

$22

7. 

A company put together a preliminary version of its Δnancial

statements. Its Net Income was $300, its Depreciation Expense was $80, and its Cash Flow from Operations was $190. The accountant found an error in computing straight-line Depreciation Expense. It should have been $70. What is Cash from Operations after Δxing this mistake? (you can ignore taxes)

Correct Response 

Net Income would increase by $10 with the smaller expense. The amount of depreciation expense added back would go down by $10. These would cancel each other out and there would be no eΔect on Cash from Operations. So, Cash from Operations would remain at $190.

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8. 

A company sold PP&E for $200 cash. Prior to the sale, the net book value of the PP&E on the Δnancial statements was $240. Thus, the company recorded a Loss on Sale of Equipment of $40 in Net Income. What is the operating cash Δow in this transaction?

Correct Response 

The answer is zero! The entire $200 cash is an investing cash Δow. The loss will be added back in the operating section, but that is merely to avoid double counting, since the loss also shows up in Net Income (i.e., the loss reduced Net Income by $40, then we added back $40 in the operating section to get to “no eΔect” on operating cash Δows).

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9. 

During the year, a company sold $500 of inventory, paid $400 to suppliers for inventory previously purchased on account, purchased $100 of inventory for cash, acquired $75 of inventory from another company in an acquisition, and translated into US dollars the value of inventory held in foreign subsidiaries, which increased inventory by $25. Which of these Inventory transactions would show up in the operating section of the SCF? (check all that apply)

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Acquired $75 of inventory from another company in an acquisition

Correct Response 

Acquisitions and foreign currency adjustments were two reasons given in the video for why a number on the SCF might not match the change on the Balance Sheet. Thus, those two transactions will not appear in the operating section. In the other cases, the sale or purchase of Inventory, or payments to suppliers, will show up in the operating section.

Correct Response 

Acquisitions and foreign currency adjustments were two reasons given in the video for why a number on the SCF might not match the change on the Balance Sheet. Thus, those two transactions will not appear in the operating section. In the other cases, the sale or purchase of Inventory, or payments to suppliers, will show up in the operating section.

Incorrect Response 

Acquisitions and foreign currency adjustments were two reasons given in the video for why a number on the SCF might not match the change on the Balance Sheet. Thus, those two transactions will not appear in the operating section. In the other cases, the sale or purchase of Inventory, or payments to suppliers, will show up in the operating section.

Correct Response 

Acquisitions and foreign currency adjustments were two reasons given in the video for why a number on the SCF might not match the change on the Balance Sheet. Thus, those two transactions will not appear in the operating section. In the other cases, the sale or purchase of Inventory, or payments to suppliers, will show up in the operating section.

Paid $400 to suppliers for inventory previously purchased on account

Sold $500 of inventory

The value of inventory held in foreign subsidiaries increased by $25 when translated into US dollars

Incorrect Response 

Acquisitions and foreign currency adjustments were two reasons given in the video for why a number on the SCF might not match the change on the Balance Sheet. Thus, those two transactions will not appear in the operating section. In the other cases, the sale or purchase of Inventory, or payments to suppliers, will show up in the operating section.

Purchased $100 of inventory for cash

10. 

A company had EBITDA of $1000, Depreciation and Amortization Expense of $100, Interest Expense of $100, and Tax Expense of $50. What was the company’s Net Income?

Correct Response 

EBITDA = Net Income (or Earnings) + Depreciation and

Amortization Expense + Interest Expense + Tax Expense. Thus, $1000 = Net Income + $100 + $100 + $50 => Net Income = $1000 – $250 = $750.

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