Question

A A B А 03 ) Sleep Country beam 2019 with credible entry and totalling 365.000, At the end of the year, Sleep Chad of 37. fe these cuentants. At the beginning of 2019, Sleep Country webes of $42,000, and at year-end, reisilities totalled 140,000 Net income for the year was 580.000. Included in net income were 14.000 the sale of land and depreciation expense of 59.000 Show how Sleep Country should report cash flows from operating activities for 2014 Sleep Country uses the indirect method. b) Identify the effects both the direction and the dollar amount-of the following assumed transactions on the total shareholders' equity of a large corporation. Each transaction is independent a) Declaration of cash dividends of $80 million b) Payment of the cash dividend declared c) 10% stock dividend. Before the dividend, 69 million common shares were outstanding: d) the market price was $7.625 at the time of the dividend. e) A 50% stock dividend. Before the dividend, 69 million common shares were outstanding: f) the market price was $13.75 at the time of the dividend. g) Sale of 600 common shares for $5.00 per share h) A 3-for-1 stock split. Prior to the split, 69 million common shares were outstanding

Answer 1

Solution:

a) Cash Flow Statement (Indirect Method)

Sleep Country Cash Flow Statement (Indirect Method) Year ended December 31, 2019 $ 80,000.00 Cash Flow from Operating Activities Net Income Adjustments for: Depreciation and amortization Profit on sale of equipment $ 9,000 (4,000) 5,000.00 85,000.00 Changes in current assets and current liabilities Increase in Current Assets Decrease in Current Liabilities (13,000) (2,000) (15,000.00) Net Cash generated from Operating Activities 70,000.00

b) Effects identification:

a) Declaration of Cash Dividend: Here, in this situation, company declared cash dividend of $ 80 million but not paid to stockholders. As we know, declared dividend is also part of stockholder’s equity as shown in company’s financial statements. Hence, there will not be any effect on stockholder’s equity.

Effect: No effect (both direction wise and dollar amount wise)

b) Payment of Cash Dividend: Here, in this situation, company paid the declared cash dividend of $ 80 million to stockholders. As we know, dividend paid results into decrease in stockholder’s equity as well as cash balance company’s financial statements. Because dividend declared was earlier shown as dividend declared and was a part of total stockholder’s equity and now it is being paid hence it will not be shown now in financial statements. Hence, it will results into reduction of stockholder’s equity.

Effect: Direction wise: Decrease

Dollar amount wise: $ 80 million

c) 10% Stock Dividend: Here, in this situation, company paid stock dividend to its stockholders. Here, we have assume that par value of stock is $ 10 per share. As we can see that market price per share is not shown in this situation hence we also assume that market price is also equal to par value of $ 10 per share. When a company declare stock dividend at par value then there will be increase in number of shares only and no effect on stockholder’s equity. Because when company pay stock dividend then some reserve account will be decreased and share capital account will increase hence net effect on stockholder’s equity will be nil.

Effect: No effect (both direction wise and dollar amount wise)

d) 10% Stock Dividend when market price is $ 7.625 per share: Here, in this situation, company paid stock dividend to its stockholders. Here, we have assume that par value of stock is $ 10 per share. As we can see that market price per share is given and is equal to $ 7.625 per share. When a company declare stock dividend at market value then there will only be an increase in number of shares but no effect on stockholder’s equity. Because when company pay stock dividend then some reserve account will be decreased and share capital account will increase hence net effect on stockholder’s equity will be nil.

Effect: No effect (both direction wise and dollar amount wise)

e) 50% Stock Dividend: Here, in this situation, company paid a large stock dividend to its stockholders. Here, we have assume that par value of stock is $ 10 per share. As we can see that market price per share is not shown in this situation hence we also assume that market price is also equal to par value of $ 10 per share. When a company declare stock dividend at par value then there will be increase in number of shares only and no effect on stockholder’s equity. Because when company pay stock dividend then some reserve account will be decreased and share capital account will increase hence net effect on stockholder’s equity will be nil.

Effect: No effect (both direction wise and dollar amount wise)

f) 50% Stock Dividend when market price is $ 13.75 per share: Here, in this situation, company paid a large stock dividend to its stockholders. Here, we have assume that par value of stock is $ 10 per share. As we can see that market price per share is given and is equal to $ 13.75 per share. In case of a large stock dividend (>25%), company will record stock dividend on par value and there will only be an increase in number of shares but no effect on stockholder’s equity. Because when company pay stock dividend then some reserve account will be decreased and share capital account will increase hence net effect on stockholder’s equity will be nil.

Effect: No effect (both direction wise and dollar amount wise)

g) Sale of 600 common shares for $ 5.00 per share: Here, in this situation, company issuing 600 common shares at $ 5.00 per share. As we know it will results into increase in cash and on the other hand increase in the stock holder’s equity. Because when company issue shares then it debit cash and other effect on stockholder’s equity.

Effect: Direction wise: Increase

Dollar amount wise: $ 3,000

h) 3-for-1 stock split: Here, in this situation, company splitting existing stock into 3 for each by issuing 138 million common shares but it will results into reduction of par value of shares equal to 1/3^rd of existing. Hence net effect on the stock holder’s equity will be nil. There will only change in increase in number of shares to 207 million.

Effect: No effect (both direction wise and dollar amount wise)