Problem 1

a) 6.5 Marks
YUL INC.
Statement of Cash flows
For the year ended December 31, 2016
Cash flows from Operating Activities
Net Income $314,078
Add (deduct) non-cash items:
Depreciation Expense: 38,000
Less gain on sale of Equipment -10,000
Increase in Trade receivables -5,520
Increase in rent receivables -4,000
Decrease in Prepaid Insurance 5,300
Increase in Inventory -11,250
Increase in Salaries Payable 9,600
Increase in Deferred revenue 9,900
Increase in income tax payable 50,000
Net Cash flows from Operating Activities $396,108

b) (3 marks) Cash Paid for Equipment acquisition:

Equipment Beginning Balance - Depreciation Expense - Carrying Value of Disposed
Equipment + Acquisition = Ending Balance

So: Acquisition = Ending Balance - Beginning Balance + Depreciation Expense +

Carrying Value of Disposed equipment:

Acquisition of Equipment = 646,000 - 334,000 + 38,000 + 30,000 = 380,000

Acquisition of land = ending land balance – beginning land balance
= 695,000 – 150,000 = $545,000

c) (1 mark) Cash for Sale of equipment:

Cash for selling equipment = carrying value + gain on sale of equipment
= 30,000 + 10,000 = 40,000

d) (2 marks) Cash paid for dividends:

Dividends = Beginning Retained earnings + net earnings – ending retained earnings
= 152,000 + 314,078 – 358,578 = 107,500

Cash paid for dividends = Dividends – dividends payable

= 107,500 – 25,000 = $82,500.

e) (1 mark) Cash paid for income tax expense:

Cash paid for tax = income tax expense – taxes payable
= $104,692 – 50,000 = $54,692
f) (1.5 marks) Cash received from customers:
Cash received from customers = Sales revenue – increase in trade receivables
= 805,400 + (9,900** – (51,520 –46,000 + 6,480*))
= 805,400 +9,900 – 12,000 = $803,300
* 6,480 = bad debt expense; necessary to factor in calculation because the trade
receivable are “net” of AFDA, and bad debt expense is the increase in AFDA.
** 9,900 = increase in deferred revenue
g) (5 marks)
Cash Coverage Ratio = (Cash flows from operations + Interest paid in cash + tax paid in
cash)
Interest paid in cash

= (396,108+36,000+54,692) = 486,800 = 13.5

36,000 36,000

YUL’s cash flows from operating activities are 13.5 times the interest it pays in cash.

Times interest earned ratio = (Net earnings + Interest expense + tax expense)
Interest expense
= (314,078+104,692+36,000 = 454,770 =12.63
36,000 36,000

YUL is generating net earnings that are 12.63 times the interest expense it incurred.

h) (1 mark)
YUL can meet its interest expense obligations through the earnings and cash it generates
from operating activities.
It has a strong stream of net earnings and cash from operating activities that allow
it to meet its interest expense obligations.
 Problem 2: (19 marks)
(a) (12.5 marks)
NR INC.
Statement of Cash Flows
For the year ended December 31, 2015
Operating Activities
Net earnings $91,480
Add (deduct) effects of non-cash items:
Depreciation expense $58,700
Gain on sale of equipment (8,750)
Increase in accounts receivable (53,800)
Increase in inventory (19,250)
Increase in accounts payable 4,420
Decrease in accrued liabilities (6,730) (25,410)
Net cash flow from operating activities 66,070
Investing Activities
Sale of land 22,500
Sale of equipment 15,550
Purchase of equipment (91,000) See note 1
Net cash flows from investing activities (52,950)
Financing Activities
Issuance of notes payable 70,000
Payment of cash dividends (37,670)
Net cash flows from financing activities 32,330
Net cash flow for the year 2015 45,450
Add: Cash balance, January 1, 2015 47,250
Cash balance, December 31, 2015 $92,700

Additional disclosure:
Equipment with a cost of $50,000 was exchanged for common shares.
Interest paid, $2,940.
Income taxes paid, $39,000.

Note 1: Transactions affecting Building and Equipment:

Purchase of equipment for cash = Ending balance at December 31, 2015 – (Beginning balance at
January 1, 2015 + Equipment purchases for non-cash consideration – Equipment sold)
Purchase for cash = [$290,000 – ($205,000 + $50,000 – $56,000)] = $91,000
b) (1.5 mark)

Cash collected from customers = Net sales – Increase in accounts receivable

= $297,500 – ($90,800 – 37,000) = $243,700

c) (2 marks)

Yes. Under IFRS, NR Inc. may classify dividends received as either an operating or an
investing activity. Similarly, interest paid can be classified as either a financing or an
operating activity.

d) (3 marks)

Quality of earnings ratio = Cash flows from operations / Net earnings

= $66,070 / $91,480 = 0.72

This ratio implies that cash flows from operations are not moving in line with net earnings
which could mean that accruals are heavily used to boost net earnings, resulting in poor
earnings quality.

Capital expenditures ratio = Cash flows from operations / Capital expenditures

= $66,070 / $91,000 = 0.73

This ratio implies that NR Inc. financed 73% of its capital expenditures through operating
activities. This means NR Inc. needs to resort to external financing (debt or equity) in order
to pay for asset purchases.
Problem 3 a)

XYZ Ltd.
Cash Flow Statement
For the Fiscal Year ended April 30, 2016

Operating activities
Net income $ 51,000
Add (deduct) items not affecting cash:
Depreciation expense 17,000
Gain on disposal of equipment (3,000)
Increase in trade receivables (24,200)
Decrease in merchandise inventory 43,000
Decrease in trade payables (32,800)
Decrease in accrued payables (8,000)
Increase in income taxes payable 7,000
Cash from (used in) operating activities $50,000
Investing activities
Acquisition of equipment (31,000)
Disposal of equipment (Calc. 1) 43,000
Sale of long-term investments 15,000
Acquisition of land (40,000)
Cash from (used in) investing activities (13,000)
Financing activities
Issuance of bonds payable 25,000
Issuance of common shares 31,000
Payment of dividends (Calc. 2) (66,000)
Cash from (used in) financing activities (10,000)

Increase (decrease) in cash 27,000

Cash balance, April 30, 2015 10,000
Cash balance, April 30, 2016 $37,000

Supplementary disclosure (required):

Interest paid, $5,000.
Income taxes paid, $12,000. [$10,000 + $19,000 - $17,000]
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Calc. 1: $92,000 + $31,000 - $82,000 = $41,000 cost of equipment sold.
$15,000 + $17,000 - $31,000 = $1,000 accum. depreciation of equipment sold.
$41,000 - $1,000 + $3,000 = $43,000 proceeds from disposal of equipment.
Calc. 2: $52,000 + $51,000 - $37,000 = $66,000.
Req. 2

Free cash flow = $50,000 - $28,000 * - $66,000 = ($44,000)

* ($31,000) + $43,000 - $40,000

• Free cash flow represents the cash available for emergency needs or to take immediate
advantage of important investment opportunities.
• In this case the free cash flow is actually negative.
• The main reason for this result is the very large cash dividend that was paid.