i NEED THIS BY AT LEAST 1PM TONIGHT. (6/18)


Prepare a statement of cash flows using the indirect method. Then
write a 350-500-word paper discussing how the different sections of
the statement of cash flows assist different sets of users. Also,
discuss the merits of using the direct method versus the indirect
method of preparation.

The Income Statement and the Statement of Cash Flows

Chapter 9 The Income Statement and the Statement of Cash Flows 351
Prepare statement of cash flows (indirect method) using balance sheet
data. Presented
below are comparative balance sheets for Millco, Inc., at January 31 and February
28, 2004.

MILLCO, INC.
Balance Sheets
February 28 and January 31, 2004 
                                                                      
                        February 28     January 31

Assets
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . .$ 42,000                $ 37,000
Accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . 64,000                   53,000
Merchandise inventory . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . 81,000                   94,000
Total current assets . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . $187,000                $184,000
Plant and equipment:
Production equipment . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . .   166,000                  152,000
Less: Accumulated depreciation . . . . . . . . . . . . . . . . . . . .
.      (24,000)                   (21,000)
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . $329,000              $315,000


Short-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . $ 44,000                    $ 44,000
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . .  . . . . 37,000                        41,000
Other accrued liabilities . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . 21,000                       24,000
Total current liabilities . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . $102,000                   $109,000
Long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . .    . 33, 000                      46,000
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . .   $135,000                     $155,000
Owners? Equity
Common stock, no par value, 40,000 shares authorized,
30,000 and 28,000 shares issued, respectively . . . . . . . . . . . .
$104,000                      $ 96,000
Retained earnings:
Beginning balance . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . $ 64,000                       $ 43,000
Net income for month . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . 36,000                            29,000
Dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . (10,000)                           (8,000)
Ending balance . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . $ 90,000                          $ 64,000

Total owners? equity . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . $194,000                        $160,000

Total liabilities and owners? equity . . . . . . . . . . . . . . . . .
.. . $329,000                         $315,000

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Clarification of Question by sleezy-ga on 18 Jul 2005 19:40 PDT

If the person answering thi questions need me to email the balance
sheet so it is clearer i can send it as a attachment.  Let me know.

Millco Statement of Cash Flows

Operations:
Net Income $36,000
Additions:
Depreciation Expense Not Using Cash $3,000
Decreased Merchandise Inventory $13,000
Subtractions:
Decreased Accounts Receivable ($11,000)
Decreased Accounts Payable ($4,000)
Decreased Other Accrued Liabilities ($3,000)
Cash Flow from Operations $34,000

Investing:
Acquisition of Production Equipment ($14,000)

Financing:
Dividends Paid ($10,000)
Proceeds from Common Stock Issued $8,000
Retirement of Long-Term Debt ($13,000)
Cash Flow from Financing ($15,000)

Net Change in Cash for Month $5,000

By preparing the statement of cash flows using the indirect method, we
lose information contained within the detailed transactions.  We only
know the net effect.  For example, production equipment and/or
merchandise inventory could have been both purchased/manufactured and
sold during the month, but we can only see the net effect of what
could be multiple transactions.

The statement of cash flows is important because cash is what allows a
business to function.  A firm can have plenty of income on its income
statement but still wind up in financial difficulty if it lacks
appropriate amounts of cash at the right times.  Revenues and expenses
on the income statement can differ from that period's cash receipts
and disbursements because of two factors: accrual accounting and
nonoperational sources of cash.  Accrual accounting typically results
in revenue recognition being separated from the actual receipt of
cash, and expenses are treated likewise.  Nonoperational sources and
uses of cash do not contribute to the firm's income and expenses, but
they can play a critical role if insufficient cash is available to
meet obligations resulting from financing, such as debt repayment or
an expected dividend.

The operations section is important because successful companies are
able to generate cash through their ongoing operations.  The
generation of additional cash beyond the expenses required to generate
it is what allows the firm to pay dividends, invest in its business,
and manage its indebtedness.  Companies that fail to generate cash
from operations over a significant period of time tend to wind up in
financial distress and bankruptcy.  This measure is particularly
important, therefore, to both a firm's managers and its investors.

The investing section shows whether or not a firm is growing and
replacing equipment as it wears out.  Investors are particularly
interested in this to see if the company is investing in its business
for growth or underinvesting, which will typically signal that growth
opportunities are lacking and that the firm's ability to produce will
eventually decline.

The financing section is important because it tells investors whether
or not the firm is diluting the value of their investment through the
issuance of more stock or is increasing the firm's risk through the
issuance of more debt.  Conversely, share buybacks and the retirement
of debt can serve to increase investors' confidence in the company.  A
firm that is generating most of its cash through financing activities
is either likely to be in a high-growth stage or is likely to be in
decline shortly.  Whether the funds are being invested in plant and
equipment, are being used for share buybacks and/or dividends, or are
languishing as cash gives investors an idea of which scenario is most
likely.

Sincerely,

Wonko

this is awesome.....great job in such a short time

This question reeks " homework/exam ".

I sincerely hope that Sleezy-ga doesn't plan to copy this answer.

Steph53

to steph53..  what business is it of yours? i personally would not ask
a homework question but i certainly would not tell someone else not
to. are you the "moral ombudsman" for google?

Ha Ha Ha!

I like it when students submit these papers.  It makes completing the
Academic Dishonesty template that much easier for me.  It's also fun
to see them explain to me how the paper was original... or that it
should be great b/c they paid for it.

The only person who wins is the one who gets the money for the
paper... not the dummy how uses it and risks suspension.  Hmmm...
maybe I should start cashing in ;-)

this was a homework assignment. I know because i am working on the
same problem currently. My only question is was the answer correct? I
have completed my cash flow statement but seem to be missing something
(assuming wonko's answer is right).