Use the Following Income Statement and Information About Changes in Noncash

question 131

Essay

Use the following income statement and information about changes in noncash current assets and liabilities to (1) prepare only the cash flows from operating activities section of the statement of cash flows using the indirect method and (2) compute the company's cash flow on total assets ratio for the year assuming that average total assets are $525,250.
$\begin{array}{c}\text {Davey Company }\\\text {Income Statement}\\\text {For Year Ended December 31}\\ \begin{array}{|l|l|l|}\hline \text { Sales } & & \$ 880,000 \\\hline \text { Grost of goods sold } & & \underline{487,000 }\\\hline\text { Gross profit }& & \$ 393,000\\\hline \text { Operating expenses: } & & \\\hline \text { Salaries expense } &\$ 144,000 & \\\hline \text { Rent expense } & 76,000 & \\\hline \text { Depreciation expense } &45,000 & \\\hline \text { Amortization expense } & 22,000 & \\\hline \text { Utilities expenses } & \underline{12,000}& \underline{299,000} \\\hline \text { Income from operations } & & \$94,000\\\hline \text { Loss on sale of equipment } & & \underline{ 14,000} \\\hline \text { Income before taxes } & & \$80,000 \\\hline & &\underline{\quad\quad} \\ \text { Income tax expense } & & \underline{ \$ 8,500}\\\hline \text { Net Income } & &\underline{ \$51,500} \\\hline & & \\\hline\end{array}\end{array}$
Changes in current asset and current liability accounts for the year that relate to operations follow.
$\begin{array} { | l | l | } \hline \text { Increase in accounts receivable } & \$ 32,000 \\\hline \text { Increase in accounts payable (all accounts } & \\\hline \text { payable transactions are for inventory) } & 13,500 \\\hline \text { Decrease in prepaid expenses } & 9,200 \\\hline \text { Decrease in merchandise inventory } & 14,000 \\\hline \text { Decrease in long-term notes payable } & 20,000 \\\hline\end{array}$

Understand the hierarchy of debt and equity and the implications of subordination.

Identify and distinguish between positive and negative covenants within the context of corporate finance.

Recognize the relationship between bond prices, coupon rates, and market interest rates.

Comprehend the factors influencing the interest rate risk of bonds including coupon rate, time to maturity, and bond features.

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