BYP 12-3 RESEARCH CASE
(a) At the end of 2009 the nonfinancial companies in the Standard and
(b) First, cash (and short term investments) do not generate a very good
return. Thus, having too much cash on your balance sheet can drag down
the return on assets. Second, managers worry that if they accumulate too
(c) In order to motivate its managers to accumulate cash, Alcoa pegged
the compensation of its top executives to cash goals. In response, top
(d) At the time the article was written the stock prices of the Standard and
Poor’s 500 was 29% below its October 2007 peak. As a consequence,
(e) In addition to acquisitions, companies can increase their dividends or
do stock buybacks (buy treasury shares).
BYP 12-4 RESEARCH CASE
(a) The stock was issued at a price of $70 per share. A few months
previously it sold for more than $300 per share.
(b) The company issued shares of stock, even though its stock price was
BYP 12-5 INTERPRETING FINANCIAL STATEMENTS
(a) Current ratio —2001: $1,207.9 ÷ $ 921.4 = 1.31
—2004: $2,539.4 ÷ $1,620.4 = 1.57
Current cash debt
(b) Cash debt
coverage—2001: ($119.8) ÷ $3,090.0 = (.04) times
(c) Free cash flow —2001: ($119.8) – $50.3 – $0 = ($170.1)
BYP 12-5 (Continued)
(d) While these measures tell us a lot about Amazon.com, they don’t tell us
whether the stock price is reasonable. Amazon.com’s high stock price
BYP 12-6 REAL-WORLD FOCUS
Answers will vary depending on the company chosen by the student.
BYP 12-7 DECISION MAKING ACROSS THE ORGANIZATION
(a) GILBERT COMPANY
Statement of Cash Flows
For the Year Ended January 31, 2014
Cash flows from operating activities
Net loss …………………………………………… $ (35,000)*
Adjustments to reconcile net income
to net cash provided by operating
activities:
Cash flows from investing activities
Sale of investment …………………………… 80,000
Cash flows from financing activities
Sale of capital stock …………………………. 405,000
BYP 12-7 (Continued)
*Computation of net income (loss)
Sales of merchandise ………………………….. $385,000
(b) From the information given, it appears that from an operating stand-
point, Gilbert Company did not have a superb first year, having suf-
fered a $35,000 net loss. Robyn is correct; the statement of cash flows
BYP 12-8 COMMUNICATION ACTIVITY
MEMO
To: Jack Werth
From: Student
Re: Statement of cash flows
The statement of cash flows provides information about the cash receipts
and cash payments of a firm, classified as operating, investing, and financing
activities. The operating activities section of the company’s statement of
The financing activities section of the statement reports cash flows resulting
from changes in long-term liabilities and stockholders’ equity. The company
BYP 12-9 ETHICS CASE
(a) The stakeholders in this situation are:
Rick Hanigan, president of Templeton Automotive Corporation.
(b) The president’s statement, “We must get that amount above $1 million,”
puts undue pressure on the controller. This statement along with his
(c) It is unlikely that any board members (other than board members who
are also officers of the company) would discover the misclassification.
Board members generally do not have detailed enough knowledge of
their company’s transactions to detect this misstatement. It is possible
BYP 12-10 ALL ABOUT YOU
(a) The article describes three factors that determine how much money
you should set aside. (1) Your willingness to take risk. You need to evaluate
how willing you are to experience wide swings in your financial position.
(2) Your needs. You need to carefully evaluate your situation and evaluate
(b) They recommend having at least three months of living expenses set
aside, and up to six months.
(c) Responses to this question will vary. What is most important is that
BYP 12-11 FASB CODIFICATION ACTIVITY
(a) Cash equivalents are short-term, highly liquid investments that have
both of the following characteristics:
a. Readily convertible to known amounts of cash
b. So near their maturity that they present insignificant risk of changes
in value because of changes in interest rates.
Generally, only investments with original maturities of three months or
less qualify under that definition. Original maturity means original
(b) Financing activities include obtaining resources from owners and
providing them with a return on, and a return of, their investment;
(c) Investing activities include making and collecting loans and acquiring
and disposing of debt or equity instruments and property, plant, and
BYP 12-11 (Continued)
(d) Operating activities include all transactions and other events that are
not defined as investing or financing activities (see paragraph 230-10-
(e) The primary objective of a statement of cash flows is to provide
relevant information about the cash receipts and cash payments of an
entity during a period.
As indicated in the glossary at this same section, cash includes not
only currency on hand but demand deposits with banks or other
(f) Information about all investing and financing activities of an entity
during a period that affect recognized assets or liabilities but that do
IFRS CONCEPTS AND APPLICATION
IFRS 12-1
Under IFRS bank overdrafts are treated as part of cash and cash
equivalents on the balance sheet. As a result, on the statement of cash
IFRS 12-2
The treatment of these items under IFRS and GAAP is as follows:
IFRS GAAP
(a) Interest paid Operating or financing Operating
IFRS 12-3
IFRS 12-4 INTERNATIONAL FINANCIAL REPORTING PROBLEM
(a) The company reports interest paid as an operating activity.
(b) Zetar’s balance in cash and cash equivalents is negative because the
(c) Under GAAP bank overdrafts are not reported in cash and cash
equivalents. Instead they are treated as a financing activity, and would
be reported on the balance sheet as a liability.
