The following is Mann Corp.’s comparative balance sheet at December 31, 2011, and 2010, with a column showing the increase (decrease) from 2010 to 2011:
Additional information:
1. On December 31, 2010, Mann acquired 25% of Bligh Corp.’s common shares for $266,000. On that date, the carrying value of Bligh’s assets and liabilities was $1,064 thousand, which approximated their fair values. Bligh reported income of $88,000 for the year ended December 31, 2011. No dividend was paid on Bligh’s common shares during the year.
2. During 2011, Mann loaned $285,000 to TMC Corp., an unrelated company. TMC made the first semi-annual principal repayment of $33,500, plus interest at 10%, on December 31, 2011.
3. On January 2, 2011, Mann sold equipment costing $70,000, with a carrying amount of $44,000, for $42,000 cash.
4. On December 31, 2011, Mann entered into a finance lease for equipment. The present value of the annual lease payments is $270,000, which equals the equipment’s fair value. Mann made the first rental payment of $47,000 when due on January 2, 2012.
5. Net earnings for 2011 were $240,000. The amount of income taxes paid was $151,000.
6. The amount of interest paid during the year was $14,900 and the amount of interest earned was $9,400. Mann has adopted the policy of classifying interest received and interest paid as operating cash flows.
7. Mann declared and paid cash dividends for 2011 and 2010 as follows:
8. The bank loan listed in the comparative balance sheet represents a line of credit used to finance operating cash demands of the business. The limit set on the operating line by the lender is $600,000. Although the operating line functions similar to a bank overdraft, at no time during 2011 did the operating line become reduced to nil.
(a) Prepare a statement of cash flows for Mann Corp. for the year ended December 31, 2011, using the indirect method, including any necessary additional note disclosures.
(b) Prepare a reconciliation of the change in property, plant, and equipment’s carrying amount to the amounts appearing on the statement of cash flows and corresponding notes.
(c) Financial statement preparers often use reconciliations of changes in major categories of balance sheet accounts to balance the statement of cash flows, as required in part (b) above. What additional insight does this reconciliation reveal to a reader of the statement that is not as evident from the statement of cash flows?
(d) What other choices did Mann Corp. have available for the classification of interest received and paid? Would your opinion of Mann’s liquidity position and ability to generate cash change from these alternative classifications?
(e) Is Mann Corp. in financial difficulty from a poor liquidity position and extremely small cash reserves?
(AICPA adapted)

  • CreatedAugust 23, 2015
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