Question

2 9 * OS * 31%D Thu Sep 24 10:17 a ACCT315 Intermediate Accounting, 17th Edition - Donald E. Kieso.pdf (page 281 of 1, 0 C. How mgnt the statement ou can now nep the user or the ninancial statements Compute two can flow ratios. P5.7 (LO 2, 3) Groupwork (Preparation of a Statement of Cash Flows and Balance Sheet) Aero Inc. had the following balance sheet at December 31, 2019. Cash Accounts receivable Investments Plant assets (net) Land Aero Inc. Balance Sheet December 31, 2019 $ 20,000 Accounts payable 21,200 Bonds payable 32,000 Common stock 81,000 Retained earnings 40,000 $194,200 $ 30,000 41,000 100,000 23,200 $194,200 During 2020, the following occurred. 1. Aero liquidated its available-for-sale debt investment portfolio at a loss of $5,000. 2. A tract of land was purchased for $38,000. 3. An additional $30,000 in common stock was issued at par. 4. Dividends totaling $10,000 were declared and paid to stockholders. 5. Net income for 2020 was $35,000, including $12,000 in depreciation expense. 6. Land was purchased through the issuance of $30,000 in additional bonds. 7. At December 31, 2020, Cash was $70,200, Accounts Receivable was $42,000, and Accounts Payable was $40,000. Instructions a. Prepare a statement of cash flows for the year 2020 for Aero. b. Prepare the unclassified balance sheet as it would appear at December 31, 2020. c. Compute Aero's free cash flow and current cash debt coverage for 2020. d. Use the analysis of Aero to illustrate how information in the balance sheet and statement of cash flows helps the user of the financial statements. Concents for Analysis

Answer 1

a $35,000 AERO INC. Statement of Cash flows (Indirect method) For The Year Ended December 31, 2020 Cash flows from Operating Activities Net Profit Adjustments to reconcile net profit to net cash provided by Operating Activities Depreciation expense $12,000 Loss on sale of available for sale debt investment $5,000 Change in operating current assets and liabilities Increase in Accounts receivable -$20,800 Increase in Accounts payable $10,000 b Aero Inc. Balance Sheet As on December 31, 2020 Cash $70,200 Accounts payable Accounts receivable $42,000 Bonds payable Plant assets(net) $69,000 Common stock Land $108,000 Retained earnings $289,200 $6,200 $41,200 $40,000 $71,000 $130,000 $48,200 $289,200 $27,000 -$38,000 -$11,000 Net Cash from Operating Activities Cash flows from Investing Activities Sale of Debt investment Purchase of Land Net Cash from Investing Activities Cash flows from Financing Activities Issue of common shares Cash dividend paid Net Cash from Financing Activities Net increase (decrease) in cash Cash balance at beginning of the year Cash balance at end of the year Working notes: Retained earnings opening balance Net Income $30,000 -$10,000 $23,200 $35,000 $58,200 $20,000 $50,200 $20,000 $70,200 Dividend paid Closing balance $10,000 $48,200 Non-cash investing and financing activities: Purchase of Land through issue of additional bonds $30,000 Land Opening balance Purchase Purchase Closing balance $40,000 $38,000 Cash $30,000 Bonds issued $108,000 Plant assets Opening balance Depreciation Closing balance $81,000 -$12,000 $69,000 C Free cash flow Cash flow from operating activities Less: Capital expenditure Free cash flow $41,200 -$38,000 $3,200 Current Cash debt coverage ratio Cash flow from operating activities Average current liabilities ($30,000+$40,000)/2 $41,200 $35,000 1.18 d The balance sheet gives the statement of assets and liabilities as on a particular date It helps in understanding the assets, liabilities and net worth of the business. It helps in understanding the working capital of the business and total capital deployed in business to generate turnover. Cash flow statement on the other hand gives the cash flow movements during the year The income statement is prepared on accrual basis and hence it does not give cash flow details Cash flow statement helps in understanding the solvency of the firm It indicates the ability of the firm to generate cash from the business to repay its current and long term liabilities to remain solvent in the long run.