FIN621 GDB

Preferred stock is hybrid instrument which contains both characteristics of (equity and debt).But some time companies show it in balance sheet as a debt.First of all we will see what is debt?debt is something that must be repaid, is not an ownership or interest in the firm, creditors do not have voting power, interest paid on debt is fully tax deductible, dividends are paid after taxes, and are considered a return on shareholders contributed capital, unpaid debt is a liability, dividends are not a liability.Now see what similiarities a preferred stock have .Preferred stock is considered a debt because it has no ownership or interest in the firm, share holders of preffered stock do not have voting power, dividen paid on debt is 70% tax deductible, dividends are paid after taxes, and are considered a return on shareholders contributed capital, unpaid debt is a liability, dividends are not a liability .Preffered stock is considered as debt due to its resemblance with bonds which are debt instruments.In addition, preferred stock may have the following features: adjustable rate,cumulative, convertible, callable,participating, and prior preferred.

FIN621 GDB

For your convenience, we are quoting here the best comments of one student:

No, net income doesn't show an amount in cash that the owner can withdraw from the business. By itself, the income statement is an inadequate measure of cash flow because it contains several common non-cash flow items. Non-cash items on an income statement are not derived from a cash flow. Net income represents the final net earnings result of the business on an accounting basis, not necessarily a cash basis. Therefore, net income statement does not reflect how much owner can withdraw from the business at any time.

While the best comments posted by another student are given below for your guidance:

No, the net income represents the income that relates to the intervening accounting period. It includes many items that are not purely cash based. For example all the sales might not be in the form of the cash. Like wise the depreciation is not a cash expense for the period.
Thus it’s not unusual that a company may show high profits in net income but may suffer shortage of cash in hand

FIN621

Answer:
Total Cash flows:
Total cash Flow: $
cash flow from operating 42,500
cash flow from investing 10,000
cash flow from financing 8,500
total cash flow 24,000
Operating cash flow:
Step 1:
Start with net income of $37,500
Step 2:
Subtract gain from sale of land of $10,000
Step 3:
Add back non-cash charges of depreciation of $7,000
Step 4:
Subtract increases in receivables and inventories and add increases of payables and
deferred taxes.
$
net income 37,500 57.500
gain from sale of land 10,000 -10000
depreciation 7,000 7000
sub total 34,500 54500
changes in operating accounts
increase in receivables 1,000 1,000
decrease in inventories 2,000 2,000
increase in accounts payables 4,000 4,000
decrease in wages payable 3,500 3,500
increase in interest payable 500 500
increase in taxes payable 1,000 1,000
increase in deferred taxes 5,000 5,000
62,500
cash flow from operations
Income tax paid 20000
Net cash flow from operations 42,500 42500
Investing cash flows:
In this question we have two components of investing cash flows;
a. The sale of land, and
b. The change in gross plant and equipment (P&E)
Cash from sale of land= decrease in asset + gain on sale
= 5,000 +10,000= $15,000 (source)
Beginning land + land purchased - gross cost of land sold
= ending land
= $40,000 + $0 – $5,000
= $ 35000
Note: If the land had been sold at loss, we would have subtracted the loss amount from
decrease in land.
P&E purchased = Ending gross P&E + gross cost of P&E sold – beginning gross P&E
= $85,000 + $0 – $60,000 = $25,000 (use)
Beginning gross P&E + P&E purchased – gross cost of P&E sold
= ending P&E
= $60,000 + $25,000-0
= $85,000
$
cash from sale of land 15,000
purchase of plant and
equipment 25,000
cash flow from investments ($10,000)
Financing cash flow:
Cash from bond issue = ending bonds payable + bonds repaid – beginning bonds payable
= 15,000+0-10,000 = $5,000 (source)
Beginning bonds payable + bonds issued – bonds repaid
= ending bonds payable
= 10,000+5,000-0
= 15,000
Cash to re-acquire stock = beginning common stock + stock issued – ending common
stock
=50,000+0-40,000
= $ 10,000(use or a net share repurchased of $ 10,000)
Beginning common stock + stock issued – stock re-acquired
= ending common stock
= $50,000+0-10,000
= $ 40,000
Cash dividends = - cash declared + increase in dividend payable
= - 8,500+5,000= $-3,500(use)
Beginning dividends payable+ dividend declared – dividend paid
= ending dividend payable
= 1,000+8,500-3,500
= $6,000
Note: if the dividend declared amount is not provided, you can calculate the amount as
follows: dividend declared = beginning retained earning + net income – ending retained
earnings. Here. $30,000 + $37,500 - $59,000= $ 8,500
Source will be added and use will be subtracted from the respective heads
$
sale of bonds 5,000
repurchase of stock 10,000
cash dividends 3,500
cash flow from financing 8,500