Search in Document OFF Home InsertDesign Layout References M

Search in Document OFF Home InsertDesign Layout References Mailings Review> Share Times New R | ? | | 12 | ? | | A-1 A? | | A Paste Paragraph Styles Intermediate Accounting Project ame Bailey Corp. just completed the most profitable year in its 25-year history Reported earnings of $1,020,000 on sales of S8,000,000 resulted in a very healthy profit margin of 12.75%. Each year before releasing the financial statements, the board of directors meets to decide on the amount of dividends to declare for the year. For each of the past nine years, the company has declared a dividend of $1 per share of common stock, which has been paid on January 15 of the following year Presented here is the income statement for the year and the comparative balance sheets as of the end of the last two years. For the Year Ended ecembe $8,000,000 4,500,000 $3,500,000 1450,000 $2,050,000 350,000 $1,700,000 680,000 Sales revenue Cost of goods sold Operating expenses Interest expense Income tax expense (40%) Gross profit Income before interest and taxes Income before taxes Net income Page 1 of 3 602 words E ?] F 102% ocus

Solution

a. Direct Method:

Indirect Method:

b. The the cash flow is only $ 80,000 ( $ 1,735,000 - $ 1,655,000). This is because the company has gone in for large scale expansion activities and acquisition of assets.

Additionally, notes payable of $ 200,000 are due for payment next year. Inability to pay these obligations would impact the financial credibility of the company adversely.

The business expansion would also require additional working capital to finance day to day operations.

The company has also gone for added financial leverage by a fresh issuance of bonds, which would increase its interest expense.

Having said that, the net working capital ( not including cash) of the company is $ 55,000. ( $ 1,060,000 - $ 1,005,000). And the ending cash balance of the company is a robust $ 480,000. Therefore a dividend payout of $ 1 per share amounting to $ 250,000 is affordable. The company would still have a positive cash balance of $ 230,000 after paying the dividends.

Bailey Corp.
Statement of Cash Flows
For the year ended December 31, 2011
	$	$
Cash Flows from Operating Activities
Cash collected from customers	7,950,000
Less: Cash paid to suppliers of inventory	(4,580,000)
Less: Cash paid for operating expenses	(1,025,000)
Less: Income Taxes paid	(610,000)
Net Cash Flows from Operating Activities		1,735,000
Cash Flows from Investing Activities
Proceeds from sale of long term investment	400,000
Cash paid for acquisition of land	(355,000)
Cash paid for acquisition of plant	(1,700,000)
Net Cash Flows used in Investing Activities		(1,655,000)
Net Cash Flows fron Financing Activities
Proceeds from Issuance of Common Stock	500,000
Interest paid	(350,000)
Dividends paid	(200,000)
Net cash used in Financing Activities		(50,000)
Net increase in cash		30,000
Beginning cash balance		450,000
Ending cash balance		480,000