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Statement of Cash Flows: Time for change

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As contained in the Week Four electronic reserve readings article readings, this article, Broome, O. W. (2004, March/April). Statement of cash flows: Time for change! Financial Analysts Journal, 60(2), 16. , describes the current SFAS No. 95 requirements for the statement of cash flows, cites recent cases of abuse and disinformation involving the statement, and makes significant recommendations for improving the statement. Based on the comments in the article do you think the three sections of the statement of cash flows provide enough information for the reader? Of the three which provides the most information or is this an 'it depends' answer?

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No, the cash flow statement does not contain enough information. Broome suggests two main improvements to the cash flow statement. First, that the operating cash flows are reported using the direct method and that the reconciliation between net income and operating cash flows is made more understandable by separating them into four basic categories: inflows not yet reported in earnings, revenues not yet collected, outflows not yet reported in earnings and expenses not yet paid for. I believe these would greatly enhance the usefulness of the cash flow report.

Broome does not take issues with the three categories of operating, investing or financing, although he cites classification abuses. For ...

Solution Summary

Your tutorial is 433 words and agrees with Dr. O. Whitfield Broome that the cash flow statement could be improved. One section is cited as more important with reasons given.

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Income Statements and Balance Sheets

Using the income statement and balance sheet below, can you please help me with the following questions?

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a. Calculate the amount of dividends Firm A and Firm B paid using the information given.
b. Prepare a statement of cash flows for each firm using the indirect method.
c. Analyze the difference in the two firms.

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The following income statement and balance sheet information are available for two firms, firm A and Firm B.

Income Statement for Year Ended December 31, 2012
Firm A Firm B
Sales $ 1,000,000 $ 1,000,000
Cost of goods sold $ 700,000 $ 700,000
Gross profit $ 300,000 $ 300,000
Other expenses
Selling and administrative $ 120,000 $ 115,000
Depreciatin $ 10,000 $ 30,000
Interest expense $ 20,000 $ 5,000
Earnings before taxes $ 150,000 $ 150,000
Income tax expense $ 75,000 $ 75,000
Net Income $ 75,000 $ 75,000

Changes in Balance Sheet Accounts December 31, 2011, to December 31, 2012

Firm A Firm B
Cash and cash equivalents $ 0 $+10,000
Accounts receivable +40,000 +5,000
Inventory +40,000 -10,000
Property, plant, and equipment +20,000 +70,000
Less accumulated depreciation (+10,000) (+30,000)
Total Assets $+90,000 $+45,000
Accounts payable $-20,000 $ -5,000
Notes payable (current) +17,000 +2,000
Long-term debt +20,000 -10,000
Deferred taxes (noncurrent) +3,000 +18,000
Capital, stock ---------- -- ---------
Retained earnings +70,000 +40,000
Total Liabilities and Equity $+90,000 $+45,000

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