Virgin Organizational Culture

Virgin Organizational Culture Virgin Groups (History) Virgin was started in 1970 by Sir Richard Branson. Today, it is one of the worlds biggest brands in many sectors like financial services, travel, music, transportation, mobile telephony, music and fitness. With 300 companies worldwide, virgin employs about 50,000 people in 30 countries, its global branded revenues in 2009 Â £11.5 billion (About Virgin, 2010). In 1968, Richard Branson issued his magazine student. To the surprise of his family he sold 50,000 copies of his magazine. In 1970, he dropped out of school and started Virgin, it began as a mail-order record company, at that time a new has been introduced that enabled people to sell records at prices that were discounted and Branson took advantage of this law. Branson new company was an instant success, sales boosted. Then, a postal strike negatively affected the mail order business. Branson changed his strategy. He opened a small record store and it was successful, many other stores followed. Many setbacks followed the strike such as tax rates and labor strikes. However, Bransons character helped him overcome these obstacles because he enjoyed overcoming new challenges. He chose to name his company virgin because it means his lack of knowledge of the type of business he entered into. In the late 1970s Virgin sponsored many bands that became very popular in the UK. During the early 1980s Branson started the airline industry by flying people between America and London. He offered entertainment and unique features for passengers. During the early 1990s Virgin Atlantic opened routes to Tokyo, Greece, Hongkong and several U.S. cities Branson continued to sign records with big stars and make millions of dollars and expand his stores to new areas. Bransons extraordinary management methods was one of the key reasons of virgins success during the 1970s and 1980s, Branson favored slacks and sweaters and abandoned the traditional formal workplace suits and ties, furthermore another technique that Branson used was that he operated his holding company from his private barge relying on his personal assistant to keep him in contact with his administrative staff, Bransons barge was located in the industrial regents canal (Virgin Groups Company History) Introduction to Organizational Culture Cultural Functions It is hard to define a culture in a single way; culture is a broad word that can be adjusted on each and every nation differently. Not limited to nations, societies, and individuals, culture can be seen everywhere even in companies and organizations. Culture contains several values, principles, beliefs and behavioral style, artifacts, language and ceremonies, inside and outside an organization, where the employees can contribute to the organization within its rules and boarders. In the industry each and every union customs their own traditions, an organization will set its own culture based on its needs and requirement to represent itself (Components of Culture, 2005). The organizational culture is important to indentify the companys identity which will be successful by introducing three important functions (Principles of Management, 2008): Control system: this function basically states what the organization managers and staff are allowed and not allowed to do, it stays within certain rules that the work force of the company should follow, and it states their behavior. Social glue: it is driving the employees to feel more belonging and integrated to the organization as it fitful their needs and social networking, and to be an important role in this company. Sense making: this important area helps the employees to understand how the company functions, what are their goals, vision, values and how do they practice in their daily life to move forward with it. These important functions also apply on Virgin, since the 1980s Branson had his own unique style of management. He gave managers the authority and full control over the projects that he established. He heavily relied on a group of executives that he selected, he trusted them and allowed them to work in their Divisions with minimum interference, based on their performance Branson offered his executives high-value incentives. An example of Bransons innovative techniques to break up his large-less personal organizations into smaller units he disbanded his record enterprise into five companies by the late 1980s, each of which focused on different artists and bands. In addition, he empowered his employees to take risks without fear of failure. He is also well known to be an adventurer and a risk-taker (Virgin Groups Company History) Adaptive Culture Ethical Culture A culture of an organization is not only affected internally, it could also get affected externally, where it is very important for any organizations culture to be adaptive to change as the employees focus on changing the culture aligned with the environment surrounding it based on its needs and to keep track with the changes (Principles of Management, 2008). To create adaptive culture, there must be a strong communication between the staff and departments; therefore Virgins way of communication is well-built, where Branson is accessible easily for all staff to listen, understand what the employee needs to take this company to the higher level. Branson is a good example of a manager, where he gets to fly in the economy class and help in serving food, that makes him live the moment and observe what needs to be changed in his company (Brown, 2010). An organization should not only have an adaptive culture, but also it should encourage having an ethical culture where their employees can practice their values ethically and competing with honor (Principles of Management, 2008), for instance Virgin airlines; they look for people who are optimistic, enthusiastic and humble. The airline uses behavioral event interviewing, in which applicants are asked questions to Indicate particular behaviors and motivations that align with a Virgin Blue personality template (Breaking in a new culture: the Virgin Blue story, 2010). Strengthen the Organization Cultural Strategies Changing and strengthen the organization culture could be done in so many ways, one of the factors is the actions of the leaders and founders where they got the opportunity to set the standard for the company (Principles of Management, 2008), just like what Virgins high profiled leaders did, the reason behind the success, it is because it has 12 members who were there from the start and they established the culture of virgin (Breaking in a new culture: the Virgin Blue story, 2010). Another way of strengthen the culture is by consistent rewards for the employees to encourage them to behave in a certain way, not limited to rewards but in addition selecting and socializing employees that could blend in with the organization culture. Moreover, aligning artifacts where sharing the stories and the support of the culture and celebrating their goals (Principles of Management, 2008). Virgin did not neglect their employees, Branson is a generous man, where he opens his house for staff parties, send them Christmas gifts, give them responsibilities to make them have the sense of ownership as they are well treated with autonomy (Brown, 2010) Nothing comes without planning and strategizing, so does the culture where there are some strategies to merge different organizational cultures (Principles of Management, 2008): Assimilation: it is when an employee gains the cultural values from a company, and it works best when a company has a weak culture. Deculturation: it is basically stripping a company from its own culture and enforce new rules and values on it, and this happens when a certain culture doesnt work for a company that needs to change. Integration: it is based on combining two cultures into one advanced culture and put it into the best picture; this case can work in an existing culture to improve it. Separation: this case happens while merging companies, however, they agree on remaining different as their business pattern requires different cultures. Conclusion Virgin have their own values such as value for money simple, but not cheap, quality values, values for challenges, brilliant customer service, enjoyment and having fun Humor, but not offensive, and last but not least value for innovation Thinking outside the box (Brown, 2010). To conclude, culture is an important broad topic, and it shapes the identity of an individual or a company, it is recommended for every new entry in the industry to clarify their values, beliefs and rules to have a strong presence in the market, any organizations culture should always be fit within the environment, moderately strong and adaptive, managers should always be aware of presenting their brand in the best way possible, and culture is one of the elements that will help creating the companys brand.

The Pirate Bay

C ASE S TUDY The Pirate Bay: The World's Most Resilient Copyright Infringer? The Pirate Bay (TPB), a Swedish Web site (Piratebay. org), is one of the world's most popular pirated music and content sites, offering free access to millions of copyrighted songs and thousands of copyrighted Hollywood movies. In June 2011, The Pirate Bay reported that it had about 5 m illion r egistered u s ers, a nd 25 m illion n on-registered u sers ( so-called â€Å"free riders â€Å"). To p ut t hat n umber i n p e rsp ec tive, c onsider t hat i t is n early t hr ee t imes t h e p opulation o f S weden i tself (9 m illion).T he P irate Bay is r egularly i n t he t op 100 m ost p opular Web sites i n t he w orld, a nd r eac h es 1 % o f t he global I nt e rn et popula ­ tion, according to I nternet a nalysts i n 2 0ll. I n S weden, Norway, a nd t he Ne therlands, i t o ften r anks a s o ne o f t he t op 10 s ites. T his d espit e t he fac t t hat TPB h as b een s ubjected t o r epeated l egal effort s to s hut i t do wn . I t b ills itself a s â€Å"the world's m ost r esilient b ittorrent site. † But t he h attIe is far f rom over.T he I nternet i s b ecoming a t ough p lace f or m usic a nd v ideo p irates to m ak e a liv in g i n p art b e c aus e o f e nforce ­ ment a ctions, b ut m ore i mportantly b ecause o f new m obile a nd w ireless t echnologies t hat e nable h igh-quality c ontent to b e s treamed for j ust a s mall fee. Q. search Torrents I ~ I ~ 1::rt. J.!! 9! I! I ~ 1D! R..! 92 How d o I clo wn'o. d? == ­ F irst s ome b ackground. T he P irate Bay is p art o f a E uropean s ocial a nd p olitical m ovement t hat o pposes c opyrighted c ontent a nd d emands t hat m usic, v ideos, TV shows, a nd o ther d igital c ontent b e f ree a nd u nrestricted.I n t he w ords o f t he P irate Party, â€Å"the P irate B ay is a u nique p latform for d istributing c ulture b etween r egular p eople a nd i ndependent a rtists, a nd t hat's s omething w e w ant to p res erve. † I n a u nique t wist o n p rior e fforts to p rovide â€Å"free† m usic, T he P irate Bay d oes n ot o perate a d atabase o f c opyrighted c ontent. N either d oes i t o perate a n etwork o f c omputers o wned b y † members† w ho s tore t he c ontent, n or c reate, o wn, o r d istribute s oftware ( like BitTorrent a nd m ost o ther s o-called P2P n etworks) t hat p ermit s uch n etworks t o e xist i n t he f irst place.T hese w ere t he o ld t echniques for r ipping o ff m usic. I nstead, T he P irate Bay s imply p rovides a s earch e ngine t hat r esponds to u ser q ueries for m usic t racks, o r s pecific m ovie t itles, a nd g enerates a l ist o f s earch r esults t hat i nclude P2P n etworks a round t he w orld w here t he t itles c an b e f ound. By click ­ ing o n a s elected l ink, u sers g ain a ccess t o t he c opyrighted c ontent, b ut o nly a fter d ownloading s oftware a nd o ther files f rom t hat P2P n etwork. Voila' â€Å"No body, n o c rime. T he P irate Bay j ust l inks i ts u sers to s tolen m edia files. W hat c ould b e i llegal? T he P irate Bay c laims i t is m erely a s earch e ngine p rovid ­ ing p ointers to existing P2P n etworks t hat it d oes n ot i tself c ontrol. I t c laims t hat i t c annot c ontrol w hat c ontent u sers u ltimately f ind o n t hose P2P n etworks, a nd t hat it is n o d ifferent f rom a ny o ther s earch e ngine, s uch a s Google o r Bing, w hich a re n ot h eld r esponsible for t he c ontent f ound o n s ites l isted i n s earch r esults.F rom a b roader s tandpoint, T he P irate Bay's f ounders a lso c laim t hat c opyright l aws i n g en ­ eral u njustly i nterfere w ith t he f ree flow o f i nformation o n t he I nternet, a nd t hat i n a ny e vent, t hey w ere n ot v iolating S wedish c opyright law, w hich t hey f elt s hould b e t he o nly l aw t hat a pplied. A nd t hey f urther c laimed t hey d id n ot e ncourage, i ncite, o r e nable i llegal d ownloading. N ever theless, t he d efendants h ave n ever d enied t heirs w as a c ommercial e nterprise.D espite all t he t alk b y t he P irate P arty c alling for t he free, u nfettered s pread o f c ulture, T he P irate B ay w as a m oney-making o peration f rom t he b eginning, d esigned to p roduce p rofits for its founders, w ith a dvertising a s t he p rimary s ource o f r evenue. H owever, i n a r uling t hat p uts to r est t he n otion t hat t he l aw is a lways b ehind t he d evelopment o f t echnology, t he F irst S wedish C ourt i n S tockholm d eclared t he f our f ounders g uilty o f v iolating S wedish c opyright law, a nd s entenced e ach t o o ne y ear i n p rison a nd p ayment o f $3. m illion i n r estitution to t he p laintiffs, all S wedish d ivisions o fthe m ajor r ecord l abel f irms ( Warner Music, Sony, a nd EMI G roup a mong t hem). T he c ourt s aid â€Å"By p roviding a w ebsite w ith † . w ell-developed s earch f unc ­ tions, e asy u ploading a nd s torage possi bilities, a nd w ith a t racker l inked to t he w eb ­ site, t he a ccused h ave i ncited t he c rimes t hat t he file s harers h ave c ommitted. † T he c ourt a lso s aid t hat t he f our d efendants h ad b een a ware o f t he fact t hat c opyrighted m aterial w as s hared w ith t he h elp o f t heir site.T he p rison s entence w as j ustified b y † extensive accessibility o f o thers' c opyrights a nd t he fact t hat t he o peration w as c on ­ ducted c ommercially a nd i n a n o rganized f ashion. † I n o ther w ords, t he c ourt b elieved t he d efendants w ere e ngaged i n a c ommercial e nterprise, t he b asis o f w hich w as e ncouraging v isitors to v iolate t he c opyrights o f o wners. I n fact, t he p rimary p urpose o f T he P irate B ay w as to violate c opyrights i n o rder to m ake m oney for t he o wners ( commercial i ntent). Enable,† â€Å"induce,† a nd † encourage† c opyright i nfringement a nd † intent to sellà ¢â‚¬  a re k ey w ords i n t his r uling a nd T he P irate Bay case. T hese c oncepts g rounded i n W estern l aw a re n ot â€Å"disabled† b y n ew t echnology, b ut i nstead c an b e, a nd are, e xtensible to n ew t echnologies, a nd u sed to s hape t echnology t o society's n eeds a nd w ishes. I ndeed, t here's a c onsensus d eveloping a mong p rosecutors a nd c ourts w orld ­ wide t hat i nfringement is n ot j ustified s imply b ecause i t's t echnically p ossible to do i t o n t he I nternet.T he P irate Bay is a ppealing t he c ourt j udgment, h as p aid n o fine, a nd i ts o wners h ave, as yet, n ever s pent a n ight i n j ail. T he P irate Bay Web site c ontinues to o perate i n S weden m uch a s before. Well, almost. I n 2 0ll, t he f irm m oved i ts s ervers i nto c aves i n S weden, a nd d ispersed m ultiple c opies o f i ts p rogram to o ther c ountries j ust i n c ase Swedish police t ry t o confiscate its s ervers a gain. Meanwhile, t he u . S. g overnment p ressured t he S wedish g overnment to s trengthen i ts copyright laws to discourage r ampant d ownloading.I n S weden, downloading m usic a nd v ideos from illegal sites w as v ery popular, e ngaged i n b y 43% o fthe S wedish Inter ­ net p opulation. 1b s trengthen its laws, S weden a dopted t he E uropean U nion c onven ­ tion o n c opyrights, w hich allows c ontent o wners to receive f rom I nternet p roviders t he n ames a nd a ddresses o f p eople s uspected o f s haring p irated files. I n F rance, participat ­ ing i n t hese p irate sites will r esult i n b anishment f rom t he I nternet for u p to t hree y ears.As a result, I nternet traffic i n S weden d eclined b y 40 % , a nd h as s tayed t here. Like t he f ight a gainst t he o riginal C aribbean p irates o f t he s eventeenth c entury, g lobal forces c ontinue t o m arshal a gainst T he P irate Bay. N ot t he B ritish N avy t his t ime, b ut a l oose c oalition o f t he U nited S tates a nd a n umber o f E urope an c ountries .. T he f irm h as b een h ounded b y l awsuits, police raids, a nd c onfiscation o f s ervers i n F rance, Finland, Italy, G ermany, D enmark, I reland, t he U. K. , a nd G reece.T hese c ountries h ave i n s ome c ases r efused to allow I nternet s ervice p roviders i n t heir c ountries to h ost T he P irate Bay, o r l ink to T he P irate Bay, n o m atter w here i n t he w orld i ts s ervers a re l ocated. T he P irate Bay h as c aused E ngland, France, Malaysia, F inland, a nd m ost r ecently t he U nited States, to c onsider s trong i ntellectual p rop ­ erty p rotection l aws t hat w ill p revent d omestic s earch e ngines a nd ISPs f rom l inking to i nfringing sites, o r r esolving t heir d omain n ames. C alled t he P rotect IP Act, t he p roposed l egislation n ow i n t he U.S. S enate i s a n e ffort to s hut o ff t raffic f rom t he U nited S tates to offshore p irate s ites t hat h ave n o s ignificant u se o ther t han e ngaging, e nabling, o r f acilit ating t he illegal c opying o r d istribution o f c opyrighted m aterial i n † substantially c omplete form. † T he t arget s ites m ust b e † dedicated t o infringing. † I n a ddition, t he l aw w ould p ermit i ntellectual p roperty o wners a nd g overnment a gencies to s eek i njunctions a gainst i nfringing sites, p otentially s hutting t hem d own i mmediately u ntil t he i ssues c an b e a rgued i n c ourt.For o nshore sites, t he I mmigra ­ tion a nd C ustoms E nforcement (ICE) a gency a lready s eizes Web site d omains t hat v iolate U. S. laws o n I nternet g ambling a nd i ntellectual p roperty t heft, a nd r edirects t his t raffic to a Web p age h osted b y ICE e xplaining t he a ction. T he P rotect I P Act a nd s imilar l egislation i n E urope is o pposed b y civil l iberties g roups a nd s earch e ngine f irms s uch a s Google.T he E lectronic F rontier F oundation (EFF) b elieves d efining † dedicated i nfringing sites† c ould b e s omewhat a rbitrary, a nd t he l egislation i ntroduces t he p ossibility t hat g overnment a gencies c ould c ensor o r s hut d own Web sites, t hreatening f reedom o f s peech. Eric Schmidt, n ow C hairman o f Google, said i n May 2011 t hat Google will fight all proposed restrictions o n s earch e ngine linking b ecause t hey c ould â€Å"set a disastrous precedent† for freedom o f speech, a nd l ead to censorship similar to t hat i mposed b y C hina.Because Google's s earch e ngine is u sed b y m illions o f people e very d ay to find BitThrrent sites, Google itself is a major contributor to infringement, albeit unintentionally. Meanwhile, t he w orld's largest advertising agency, GroupM, h as k eelhauled T he P irate Bay a nd 2,000 o ther s ites worldwide b y p utting t he s ites o n i ts blacklist o f copyright infringing sites w here it will n ot b uy a dvertising space.Pirating intellectual p roperty is, above all, about t he m oney, as a ny good pirate knows. T h e P irate Bay case is j ust t he l atest i n a saga o f c ourt c ases involving t he r ecord industry, w hich w ants to preserve its d ominance o f c opyrighted music, a nd I nter ­ net u sers who w ant free music. I n 200S, after several years o f h eated c ourt b attles, t he c ase o f Metro-Goldwyn-Mayer Studios v. Grokster, et al. f inally r eached t he u . S. Supreme Court.I n J une 200S, t he C ourt h anded d own its u nanimous decision: Inter ­ net file-sharing services s uch as Grokster, StreamCast, BitThrrent, a nd Kazaa could b e h eld liable for copyright i nfringement b ecause t hey i ntentionally s ought to induce, enable, a nd e ncourage users to share m usic t hat w as o wned b y r ecord companies. Indeed, i t w as t heir b usiness model: steal t he music, g ather a h uge a udience, a nd m onetize t he a udience b y a dvertising o r t hrough s ubscription fees. Since t he c ourt ruling, Kazaa, Morpheus, Grokster, BearShare, iMesh, a nd m any o thers h ave e ither . one o ut o f business o r s ettled w ith t he r ecord firms a nd c onverted themselves i nto legal file-sharing sites b y e ntering i nto relationships w ith m usic i ndustry firms. I n May 2010, M ark Gorton, founder o f t he l argest u. S. pirate site, LimeWire, lost a copy ­ right i nfringement case. I n May 2011, a dmitting h is guilt (â€Å"I w as wrong†), a nd h aving facilitated t he m ass p iracy o f billions o f s ongs over a lO-year period, Gorton a nd h is file-sharing c ompany a greed to compensate t he four largest record labels b y p aying t hem $10S million.T hese l egal victories, a nd s tronger g overnment e nforcement o f c opyright laws, have n ot p roven to b e t he m agic b ullet t hat m iraculously solves all t he p roblems facing t he m usic i ndustry. I n a ddition to t he i ssue o f illegal downloads, legitimate digital music sales h ave so far failed to m ake u p for falling CD s ales revenues. T he o nly h ope for t he m usic i ndustry is to cha nge its b usiness m odel a nd decisively move towards digital distribution platforms. H ere t hey a re m aking s triking progress b ut c ontinue to face r evenue declines.I n 2011, digital m usic sales a ccount for n early SO% o f industry r evenues, totaling $S. 7 billion, u p f rom $1. 9 billion i n 2006. I n 2 m2, digital sales o f m usic will exceed sales from CDs. I n 2011, a nnual r evenue f rom CD s ales is 1ess t han h alf of 200S1evels. Album sales o f 12 o r m ore songs, b oth digital a nd o n CD, a re also d own IS% a nnually o ver t he s ame p eriod. Since 2003, t housands o f r etail music stores have closed, a nd Walmart h as c ut b ack s helf s pace devoted to CDs a nd n ow c arries only t he t op titles.As CD sales o f complete albums p lummet, o nline m usic s ales o f singles are soar ­ ing rapidly, l ed b y iThnes. Sales o f digital m usic a t iThnes, Rhapsody, a nd e Music have b een growing a t a bout SO% p er y ear s ince 2006. Apple dominates t he m usical d ownload s cene a nd h as b ecome t he l argest retailer o f m usic i n t he U nited States, – SOURCES: â€Å"World's Biggest Ad Agency Keelhauls 2,000 Pirate Sites,† by Natalie Apostolu, The Register, June 14, 2011; â€Å"Internet Piracy and How to Stop It,† New York Times, June 8,2011; â€Å"The â€Å"Pirate Bay: FiveYears After the Raid,† by Ernesto, Torrentfreak. com, May 31,2011; â€Å"Why Google Would Defend Pirate Bay? ,† by Parmy Olson, Forbes, May 19, 2011; â€Å"The Protect IPAct: COICA Redux,† by Abigail Phillips, Electronic Frontier Foundation, May 12,2011; â€Å"Preventing Real Online Threats to Economic Creativity and Theft 01 Intellectual Property (Protect IP Act) 012011,† United States Senate, 112th Congress, 1st Session, 2011; â€Å"Pirate Bay Keeps Sinking: Another Law Suit Coming,† by Stan Schroeder, mashable. com, June 22, 2010; â€Å"Idea Man 01 LineWire at aCrossroads,† by Joseph Plambeck, New York Times, May 23, 2010; â€Å"Pirate Bay Sunk by Hollywood Injunction For Now,† by Charles Arthur, The Guardian, May 17 2010; â€Å"British PutTeeth in Anti ­ Piracy Proposal,† by Eric Planner, New York Times, March 14,2010; â€Å"How Pandora Slipped Past the Junkyard,† by Claire Cain Miller, New York Times, March 7, 2010. r eplacing Walmart. By 2011, t he i Thnes Store h ad s old o ver 15 billion songs, 450 million TV shows, a nd o ver 100 million movies, m aking i t t he w orld's m ost p opular o nline m usic, TV, a nd m ovie store.Its r evenues a re u p 75% i n t he l ast year. Driving t his p erformance, o f course, are t he s ales o f its various i-devices. By mid-2011, Apple h ad s old over 300 million iPods (all models), over 125 million iPhones, a nd 25 m illion iPads. A nd a ccording to a s tudy b y A rbor N etworks a nd t he U niversity o f M ichigan, p eer-to-peer t raffic is s hrinking d ramatically, a nd s treaming o f video a nd m usic f rom l egiti mate s ites h as g rown to o ver 10 % o f all I nternet traffic.R esearchers s urmise t hat c onsumers h ave j ust f ound i t a l ot e asier a nd m ore c onvenient t o access videos a nd m usic f rom t hese s ites r ather t han u sing P2P s haring s ites w here a m ovie c an t ake e ight h ours to download, a nd w here d ownloading m usic t racks c an also b ring a h ost o f m al ware w ith t he m usic. I n a ddition, t he w hole i dea o f â€Å"owning† m usic i n t he f orm o f records, tapes, CDs, a nd m usic files s tored o n y our h ard d rive is o ut o f d ate. While s ubscription m odels i n t he p ast d id n ot w ork, t hey w ere l imited t o s treaming m usic t o d esktop a nd l aptop PCs.I n t he w orld o f mobile I nternet d evices, t he i dea o f s treaming m usic all d ay l ong t o y our i Phone o r B lackBerry is m uch m ore a ttractive. I n 2011, P andora, t he m usic ­ streaming service, h as o ver 94 m illion r egistered u sers a nd 34 m illion s ubscribers, 30% o f w hom c onnect w ith s martphones. T he U. K. m usic s ervice Spotify o pened to U. S. c ustomers i n J uly 2011, a nd o ffers its 10 m illion s ubscribers a ccess to m ore t han 13 m illion s treaming m usic t racks t hat c an b e p layed i nstantly b y j ust d ragging t he s ong y ou w ant t o y our i Phone a pp.Users do n ot n eed t o w ait for d ownloads o r c lutter t heir h ard d rives a nd f lash drives w ith files, o r o rganize t he t housands o f s ongs o n t heir s torage devices. However, a d ownload s ervice was a dded i n 2011. I n e ach o f t hese n ew m edia d elivery p latforms, t he c opyright o wners-record c ompanies, a rtists, a nd H ollywood s tudios-have s truck l icensing d eals w ith t he t ech ­ nology p latform o wners a nd d istributors (Apple, Amazon, a nd Google).T hese n ew p latforms o ffer a w in-win s olution. C onsumers a re b enefitted b y h aving n ear i nstant a ccess to high-quality m usic t racks a nd v ideos w ithout t he h assle o f P2P software downloads. C ontent o wners g et a g rowing r evenue s tream a nd p rotection for t heir c opyrighted c ontent. A nd t he p irates? T he P irate Bay a nd o ther p irate s ites m ay n ot b e a ble to c ompete w ith n ew a nd b etter w ays to l isten t o m usic a nd v iew v ideos.Like t he r eal p irates o f the C aribbean, t echnology a nd c onsumer p reference for e ase o f use m ay l eave t hem b ehind. Case Study Questions 1. Do you think The Pirate Bay can continue to survive in a global Internet world? Why or why not? 2. Why is legislation like The Protect IP Act opposed by Google and civil liberties groups? 3. Do you think it is possible to reliably identify â€Å"dedicated infringing Web sites? † What criteria do you suggest? 4. Why does cloud computing threaten pirate sites?

Kimmel Financial Accounting Solutions Ch12

CHAPTER 12 Statement of Cash Flows Study Objectives 1. Indicate the usefulness of the statement of cash flows. 2. Distinguish among operating, investing, and financing activities. 3. Explain the impact of the product life cycle on a company’s cash flows. 4. Prepare a statement of cash flows using the indirect method. 5. Use the statement of cash flows to evaluate a company. *6. Prepare a statement of cash flows using the direct method. Summary of Questions by Study Objectives and Bloom’s Taxonomy |Item | |? 1. | |? 1. | |? 1. | |? 1. |? 1. | |? 1. |2 |C |? 4|6* |AP|? 7. | | | | |. | | | | | | | | | | | | |1A | |Distinguish among operating, investing, and financing | |Simple | |10–15 | | | |activities. | | | | | | | | | | | | |2A | |Determine cash flow effects of changes in equity accounts. | |Simple | |10–15 | | | | | | | | | |3A | |Prepare the operating activities section—indirect method. |Simple | |20–30 | | | | | | | | | |*4A | |Prepare t he operating activities section—direct method. | |Simple | |20–30 | | | | | | | | | |5A | |Prepare the operating activities section—indirect method. |Simple | |20–30 | | | | | | | | | |*6A | |Prepare the operating activities section—direct method. | |Simple | |20–30 | | | | | | | | | |7A | |Prepare a statement of cash flows—indirect method, and compute cash-based ratios. |Moderate | |40–50 | | | | | | | | | |*8A | |Prepare a statement of cash flows—direct method, and compute cash-based ratios. | |Moderate | |40–50 | | | | | | | | | |9A | |Prepare a statement of cash flows—indirect method. |Moderate | |40–50 | | | | | | | | | |*10A | |Prepare a statement of cash flows—direct method. | |Moderate | |40–50 | | | | | | | | | |11A | |Prepare a statement of cash flows—indirect method. | |Moderate | 40–50 | | | | | | | | | |12A | |Identify the impact of transactions on ratios. | | Moderate | |25–35 | | | | | | | | | |1B | |Distinguish among operating, investing, and financing | |Simple | |10–15 | | | |activities. | | | | | | | | | | | | |2B | |Determine cash flow effects of changes in plant asset | |Simple | |10–15 | | | |accounts. | | | | | | | | | | | | | |3B | |Prepare the operating activities section—indirect method. |Simple | |20–30 | | | | | | | | | |*4B | |Prepare the operating activities section—direct method. | |Simple | |20–30 | | | | | | | | | |5B | |Prepare the operating activities section—indirect method. |Simple | |20–30 | | | | | | | | | |*6B | |Prepare the operating activities section—direct method. | |Simple | |20–30 | | | | | | | | | |7B | |Prepare a statement of cash flows—indirect method, and compute cash-based ratios. |Moderate | |40–50 | | | | | | | | | ASSIGNMENT CHARACTERISTICS TABLE (Continued) |Problem | | | |Difficulty | |Time | |Number | |Des cription | |Level | |Allotted (min. | | | | | | | | | |*8B | |Prepare a statement of cash flows—direct method, and compute cash-based ratios. | |Moderate | |40–50 | | | | | | | | | |9B | |Prepare a statement of cash flows—indirect method. |Moderate | |40–50 | | | | | | | | | |*10B | |Prepare a statement of cash flows—direct method. | |Moderate | |40–50 | | | | | | | | | |11B | |Prepare a statement of cash flows—indirect method. | |Moderate | |40–50 | | | | | | | | |ANSWERS TO QUESTIONS ?1. (a)The statement of cash flows reports the cash receipts, cash payments, and net change in cash resulting from the operating, investing, and financing activities of a company during a period in a format that reconciles the beginning and ending cash balances. (b)Disagree. The statement of cash flows is required. It is the fourth basic financial statement. ?2. The statement of cash flows answers the following questions about cash: (a) Where di d the cash come from during the period? (b) What was the cash used for during the period? nd (c) What was the change in the cash balance during the period? ?3. The three activities are: Operating activities include the cash effects of transactions that create revenues and expenses and thus enter into the determination of net income. Investing activities include: (a) purchasing and disposing of investments and productive long-lived assets and (b) lending money and collecting loans. Financing activities include: (a) obtaining cash from issuing debt and repaying amounts borrowed and (b) obtaining cash from stockholders, repurchasing shares, and paying them dividends. ?4. a)Major sources of cash in a statement of cash flows include cash from operations; issuance of debt; collection of loans; issuance of capital stock; sale of investments; and the sale of property, plant, and equipment. (b)Major uses of cash include purchase of inventory, payment of cash dividends; redemption of debt; pu rchase of investments; making loans; redemption of capital stock; and the purchase of property, plant, and equipment. ?5. The statement of cash flows presents investing and financing activities so that even noncash transactions of an investing and financing nature are disclosed in the financial statements.If they affect financial conditions significantly, the FASB requires that they be disclosed in either a separate schedule at the bottom of the statement of cash flows or in a separate note or supplementary schedule to the financial statements. ?6. Examples of significant noncash activities are: (1) issuance of stock for assets, (2) conversion of bonds into common stock, (3) issuance of bonds or notes for assets, and (4) noncash exchanges of property, plant, and equipment. ?7. Comparative balance sheets, a current income statement, and certain transaction data all provide information necessary for preparation of the statement of cash flows.Comparative balance sheets indicate how ass ets, liabilities, and equities have changed during the period. A current income statement provides information about the amount of cash provided or used by operations. Certain transactions provide additional detailed information needed to determine how cash was provided or used during the period. ?8. (a)The phases of the corporate life cycle are the introductory phase, growth phase, maturity phase, and decline phase. (b)During the introductory phase, cash from operations and investing would be expected to be negative, and cash from financing would be positive.Questions Chapter 12 (Continued) During the growth phase, a company would be expected to show some small amounts of cash from operations while continuing to show negative cash from investing and positive cash from financing. During the maturity phase, cash from operations, investing, and financing would all be expected to be positive while in the decline phase, cash from operations and investing would continue to be positive wh ile cash from financing would be negative. ?9. Tootsie Roll has positive cash from operations that exceeds its net income.Cash from operations exceeded its investing needs and it retired shares of stock and paid dividends. Tootsie Roll appears to be in the middle to late maturity phase. 10. The advantage of the direct method is that it presents the major categories of cash receipts and cash payments in a format that is similar to the income statement and familiar to statement users. Its principal disadvantage is that the necessary data can be expensive and time-consuming to accumulate. The advantage of the indirect method is it is often considered easier o prepare, and it provides a reconciliation of net income to net cash provided by operating activities. It also tends to reveal less company information to competitors. Its primary disadvantage is the difficulty in understanding the adjustments that comprise the reconciliation. Both methods are acceptable but the FASB expressed a pr eference for the direct method. Yet, the indirect method is the overwhelming favorite of companies. 11. When total cash inflows exceed total cash outflows, the excess is identified as a â€Å"net increase in cash† near the bottom of the statement of cash flows. 12.The indirect method involves converting accrual net income to net cash provided by operating activities. This is done by starting with accrual net income and adjusting for items that do not affect cash. Examples of adjustments include depreciation and other noncash expenses, gains and losses on the sale of noncurrent assets, and changes in the balances of current asset and current liability accounts from one period to the next. 13. It is necessary to convert accrual-based net income to cash-basis income because the unadjusted net income includes items that do not provide or use cash.An example would be an increase in accounts receivable. If accounts receivable increased during the period, revenues reported on the ac crual basis would be higher than the actual cash revenues received. Thus, accrual-basis net income must be adjusted to reflect the net cash provided by operating activities. 14. A number of factors could have caused an increase in cash despite the net loss. These are (1) high cash revenues relative to low cash expenses; (2) sales of property, plant, and equipment; (3) sales of investments; (4) issuance of debt or capital stock, and (5) differences between cash and accrual accounting, e. . depreciation. 15. Depreciation expense. Gain or loss on sale of a noncurrent asset. Increase/decrease in accounts receivable. Increase/decrease in inventory. Increase/decrease in accounts payable. Questions Chapter 12 (Continued) 16. Under the indirect method, depreciation is added back to net income to reconcile net income to net cash provided by operating activities because depreciation is an expense but not a cash payment. 17.The statement of cash flows is useful because it provides information to the investors, creditors, and other users about: (1) the company’s ability to generate future cash flows, (2) the company’s ability to pay dividends and meet obligations, (3) the reasons for the difference between net income and net cash provided by operating activities, and (4) the cash and noncash financing and investing transactions during the period. 18. This transaction is reported in the note or schedule entitled â€Å"Noncash investing and financing activities† as follows: â€Å"Retirement of bonds payable through issuance of common stock, $1,700,000. 19. (a)The current ratio is an accrual-based ratio that measures liquidity while the current cash debt coverage ratio is a cash-based ratio that measures liquidity. (b)Solvency can be measured by the debt to total assets ratio (accrual-based) or the cash debt coverage ratio (cash-based). *20. Net cash provided by operating activities under the direct approach is the difference between cash revenues and c ash expenses. The direct approach adjusts the revenues and expenses directly to reflect the cash basis. This results in cash net income, which is equal to â€Å"net cash provided by operating activities. | | | | | |  + Decrease in accounts receivable | |*21. |(a) |Cash receipts from customers = Revenues from sales | | | | | | | | | |  Ã¢â‚¬â€œ Increase in accounts receivable | | | | | | | | | | | | |  + Increase in inventory | | |(b) |Purchases = Cost of goods sold | | | | | | | | | |  Ã¢â‚¬â€œ Decrease in inventory | | | | | | | | | | | | |  + Decrease in accounts payable | | | |Cash payments to suppliers = Purchases | | | | | | | | | |  Ã¢â‚¬â€œ Increase in accounts payable | | | | | | | | 22. Sales$2,000,000 Add: Decrease in accounts receivables 100,000 Cash receipts from customers$2,100,000 *23. Depreciation expense is not listed in the direct method operating activities section because it is not a cash flow item—it does not affect cash. SOLUTIONS TO BRIEF EXERCISES BRIEF EXERCISE 12-1 (a)Cash inflow from financing activity, $200,000. (b)Cash outflow from investing activity, $150,000. (c)Cash inflow from investing activity, $20,000. (d)Cash outflow from financing activity, $50,000.BRIEF EXERCISE 12-2 (a)Investing activity. (d)Operating activity. (b)Investing activity. (e)Financing activity. (c)Financing activity. (f)Financing activity. BRIEF EXERCISE 12-3 Cash flows from financing activities Proceeds from issuance of bonds payable$300,000) Payment of dividends(70,000) Net cash provided by financing activities$230,000) BRIEF EXERCISE 12-4 (a)Cash from operations would be lower than net income during the growth phase because inventory must be purchased for future projected sales.Since sales during the growth phase are projected to be increasing, inventory purchases must increase and inventory expensed on an accrual basis would be less than inventory purchased on a cash basis. Also, collections on accounts receivable would lag beh ind sales; thus, accrual sales would exceed cash collections during the period. (b)Cash from investing is often positive during the late maturity phase and the decline phase because the firm may sell off excess long-term assets that are no longer needed for productive purposes. BRIEF EXERCISE 12-5Net cash provided by operating activities is $2,680,000. Using the indirect approach, the solution is: Net income$2,500,000 Adjustments to reconcile net income to net cash provided by operating activities Depreciation expense$110,000) Accounts receivable decrease? 350,000) Accounts payable decrease(280,000) 180,000 Net cash provided by operating activities$2,680,000 BRIEF EXERCISE 12-6 Cash flows from operating activities Net income$280,000 Adjustments to reconcile net income to net cash provided by operating activities Depreciation expense$70,000Loss on sale of plant assets? 22,000 92,000 Net cash provided by operating activities$372,000 BRIEF EXERCISE 12-7 Net income$200,000 Adjustm ents to reconcile net income to net cash provided by operating activities Decrease in accounts receivable$80,000) Increase in prepaid expenses(28,000) Increase in inventories(40,000) 12,000 Net cash provided by operating activities$212,000 BRIEF EXERCISE 12-8 Original cost of equipment sold$22,000 Less: Accumulated depreciation 5,500 Book value of equipment sold? 16,500 Less: Loss on sale of equipment 3,500Cash flow from sale of equipment$13,000 BRIEF EXERCISE 12-9 (a)Free cash flow = $127,260,000 – $221,160,000 – $0 = ($93,900,000) (b)Current cash debt coverage ratio = $127,260,000 ? $243,668,000 = .52 times (c)Cash debt coverage ratio = $127,260,000 ? $928,464,500 = . 14 times BRIEF EXERCISE 12-10 (a)Free cash flow = $405,000 – $200,000 – $0 = $205,000 (b)Current cash debt coverage ratio = $405,000 ? $150,000 = 2. 7 times (c)Cash debt coverage ratio = $405,000 ? $225,000 = 1. 8 times BRIEF EXERCISE 12-11 Free cash flow = $123,100,000 – $20,800, 000 = $102,300,000 BRIEF EXERCISE 12-12Free cash flow is cash provided by operations less capital expenditures and cash dividends paid. For Payne Inc. this would be $364,000 ($734,000 – $280,000 – $90,000). Since it has positive free cash flow that far exceeds its dividend, an increase in the dividend might be possible. However, other factors should be considered. For example, it must have adequate retained earnings, and it should be convinced that a larger dividend can be sustained over future years. It should also use the free cash flow to expand its operations or pay down its debt. *BRIEF EXERCISE 12-13 | | | | | | + Decrease in accounts receivable | |Receipts from |= |Sales | | | | | |customers | |revenues | | | | | | | | | | | | – Increase in accounts receivable | | | | | | | | | $1,285,759,000 = $1,287,672,000 – $1,913,000 (Increase in accounts receivable) *BRIEF EXERCISE 12-14 | | | | | | + Decrease in income taxes payable | |Cash payment |= |Incom e Tax | | | | | |for income taxes | |Expense | | | | | | | | | | | | – Increase in income taxes payable | | | | | | | | | $125,000,000 = $370,000,000 – $245,000,000* *$522,000,000 – $277,000,000 = $245,000,000 (Increase in income taxes payable) *BRIEF EXERCISE 12-15 | | | | | | + Increase in prepaid expenses | | | | | | | | | |Cash |= |Operating | | | | – Decrease in prepaid expenses | |payments for | |expenses, | | | | | |operating | |excluding | | | | | |expenses | |depreciation | | | | | | | | | | | | | | | | | | | |and  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚   | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | + Decrease in accrued expenses payable | | | | | | | | | | | | | | | | – Increase in accrued expenses payable | | | | | | | | | $79,000 = $90,000 – $6,600 – $4,400 SOLUTIONS TO DO IT! REVIEW EXERCISES DO IT! 12-1 (1)Financing activity (2)Operating activity (3)Financing activity (4)Investing activity (5)Investing acti vity DO IT! 12-2 Cash flows from operating activities Net income$100,000 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation expense$6,000 Patent amortization expense2,000 Gain on sale of equipment(3,600) Decrease in accounts receivable6,000 Increase in accounts payable   3,200  Ã‚  Ã‚  Ã‚  13,600 Net cash provided by operating activities$113,600 DO IT! 12-3 (a) Free cash flow = $73,700 – $27,000 –$15,000 = $31,700 b) Cash provided by operating activities fails to take into account that a company a must invest in new plant assets just to maintain the current level of operations. Companies must also maintain dividends at current levels to satisfy investors. The measurement of free cash flow provides additional insight regarding a company’s cash-generating ability. SOLUTIONS TO EXERCISES EXERCISE 12-1 (a)Noncash investing and financing activities. (b)Financing activities. (c)Noncash investing and financing activities. (d)Financing activities. (e)Investing activities. (f)Operating activities. (g)Operating activities. EXERCISE 12-2 |(a) |Operating activity. | |(h) |Financing activity. |(b) |Noncash investing and | |(i) |Operating activity. | | |financing activity. | |(j) |Noncash investing and financing | |(c) |Investing activity. | | |activity. | |(d) |Financing activity. | |(k) |Investing activity. | |(e) |Operating activity. | |(l) |Operating activity. | |(f) |Noncash investing and financing activity. | |(m) |Operating activity (loss); investing | | |Operating activity. | | |activity (cash proceeds from sale). |(g) | | |(n) |Financing activity. | EXERCISE 12-3 |Point in Time | |Phase | | | | | |A | |Introductory phase | |B | |Decline phase | |C | |Maturity phase | |D | |Growth phase | During the introductory phase (point A), cash from operations and investing are expected to be negative while cash from financing would be positive.In the growth phase (point D), a company would continue to show negative cash from operations and investing and positive cash from financing. EXERCISE 12-3 (Continued) During the maturity phase (point C), cash from operations and net income would be approximately the same. Cash from operations would exceed investing needs. In the decline phase (point B), cash from operations would diminish while cash from financing would be negative. EXERCISE 12-4 JEREZ COMPANY Partial Statement of Cash Flows For the Year Ended December 31, 2010 Cash flows from operating activities Net income$190,000 Adjustments to reconcile net income to net cash provided by operating activities Depreciation expense$35,000Loss on sale of equipment 5,000 Increase in accounts payable? 17,000 Decrease in accounts receivable? 15,000 Decrease in prepaid expenses 4,000 76,000 Net cash provided by operating activities$266,000 EXERCISE 12-5 KITSELTON INC. Partial Statement of Cash Flows For the Year Ended December 31, 2010 Cash flows from operating activities Net income$153,000 Adjus tments to reconcile net income to net cash provided by operating activities Depreciation expense$34,000) Increase in accrued expenses payable? 10,000) Decrease in inventory? 4,000 Increase in prepaid expenses (5,000) Decrease in accounts payable(7,000) Increase in accounts receivable  (11,000) 25,000Net cash provided by operating activities$178,000 EXERCISE 12-6 FELIX CORPORATION Statement of Cash Flows—Indirect Method For the Year Ended December 31, 2010 Cash flows operating activities Net income$284,100 Adjustments to reconcile net income to net cash provided by operating activities Depreciation expense$187,000 Increase in income tax payable4,700 Decrease in accounts payable     Ã‚  (3,700) Increase in accounts receivable(8,200) Increase in inventory   (11,000)   168,800 Net cash provided by operating activities452,900 Cash flows from investing activities Sale of land     Ã‚  35,000 Purchase of building  (129,000) Net cash used by investing activities(94,0 00)Cash flows from financing activities Issuance of bonds200,000 Payment of dividend   (12,000) Purchase of treasury stock     (32,000) Net cash provided by financing activities   156,000 Net increase in cash514,900 Cash at beginning of period  Ã‚  Ã‚  Ã‚  45,000 Cash at end of period$559,900 EXERCISE 12-7 TOVAR CORP Partial Statement of Cash Flows For the Year Ended December 31, 2010 Cash flows from operating activities Net income$? 72,000) Adjustments to reconcile net income to net cash provided by operating activities Depreciation expense$28,000) Loss on sale of equipment 8,000) 36,000) Net cash provided by operating activities? 108,000) Cash flows from investing activitiesSale of equipment? 11,000* Purchase of equipment(70,000) Construction of equipment(53,000) Net cash used by investing activities(112,000) Cash flows from financing activities Payment of cash dividends? (19,000) *Cost of equipment sold$49,000) *Accumulated depreciation (30,000)) *Book value? 19,000) *Loss on sale of equipment? (8,000)) *Cash proceeds$11,000) EXERCISE 12-8 (a)MATSUI COMPANY Statement of Cash Flows For the Year Ended December 31, 2010 Cash flows from operating activities Net income$ 93,000) Adjustments to reconcile net income to net cash provided by operating activities Depreciation expense$34,000) Decrease in inventory? 19,000)Increase in accounts receivable? (9,000) Decrease in accounts payable(8,000) 36,000) Net cash provided by operating activities? 129,000) Cash flows from investing activities Sale of land? 20,000) Purchase of equipment(60,000) Net cash used by investing activities? (40,000) Cash flows from financing activities Issuance of common stock? 42,000) Payment of cash dividends (35,000) Redemption of bonds (50,000) Net cash used by financing activities? (43,000) Net increase in cash 46,000) Cash at beginning of period 22,000) Cash at end of period$? 68,000) EXERCISE 12-8 (Continued) (b)1. Current cash debt coverage ratio: |Net cash provided |? Average current | |by operating activities | |liabilities | |$129,000 |? |[pic] |= |3. 0 times | |[Per Part (a)] | | | | | 2. Cash debt coverage ratio: |Net cash provided |? |Average total | |by operating activities | |liabilities | $129,000 ? [pic] = . 59 times *$47,000 + $200,000 **$39,000 + $150,000 EXERCISE 12-9 | | | |PepsiCo |Coca-Cola | |(a) |Liquidity | | | | | | |Current cash debt | |[pic] = . 75 times | |[pic] = . 64 times | | |coverage ratio | | | | | |(b) |Solvency | | | | | | |Cash debt coverage ratio | |[pic] = . 38 times | |[pic] = . 6 times | | | | | | | | | |Free cash flow | |$6,084 – $2,068 – $1,854 | |$5,957 – $1,407 – $2,911 | | | | |= $2,162 | |= $1,639 | PepsiCo’s liquidity is higher (better) than Coca-Cola’s. PepsiCo’s current cash debt coverage ratio is 17% higher than Coca-Cola’s. Coca-Cola’s solvency is slightly higher than PepsiCo’s since its cash debt coverage ratio is higher but its f ree cash flow smaller. EXERCISE 12-10 | | |Hoyt | |Rex | | | | |Corporation | |Corporation | |(a) |Liquidity | | | | | | |Current cash debt | |[pic] = 2. 0 times | |[pic] = 1. 0 times | | |coverage ratio | | | | | |(b) |Solvency | | | | | | |Cash debt | |[pic] = . 50 times | |[pic] = 0. 0 times | | |coverage ratio | | | | | | | | | | | | | |Free cash flow | |$100,000 – $40,000 – $5,000 | |$100,000 – $70,000 – $10,000 | | | | |= $55,000 | |= $20,000 | Hoyt’s liquidity and solvency ratios are higher (better) than Rex’s comparable ratios. In particular, Hoyt’s current cash debt coverage ratio is twice as high as Rex’s.This ratio indicates that Hoyt is substantially more liquid than Rex. Hoyt’s solvency, as measured by the cash debt coverage ratio and free cash flow, is also better than Rex’s. *EXERCISE 12-11 Revenues$192,000) Deduct: Increase in accounts receivable(70,000) Cash receipts from customers*$122,000 O perating expenses 83,000) Deduct: Increase in accounts payable(23,000) Cash payments for operating expenses** 60,000 Net cash provided by operating activities$? 62,000 |** |Accounts Receivable | | |Balance, Beginning of year    | | | |Revenues for the year 192,000   |  Cash receipts for year 122,000 | | |Balance, End of year ? 70,000   | | |** |Accounts Payable | | | |  Balance, Beginning of year 0 | | |Payments for the year ? 0,000   |  Operating expenses for year ? 83,000 | | | |  Balance, End of year ? 23,000 | *EXERCISE 12-12 (a)Cash payments to suppliers Cost of goods sold$5,349. 7million Add: Increase in inventory 4. 7 Cost of purchases$5,354. 4million Deduct: Increase in accounts payable(156. 1) Cash payments to suppliers$5,198. 3million (b)Cash payments for operating expenses Operating expenses exclusive of depreciation ($11,791. 6 – $1,249. 9)$10,541. 7millionDeduct: Decrease in prepaid expenses$(204. 5) Increase in accrued expenses payabl e  (37. 0) (241. 5) Cash payments for operating expenses$10,300. 2million *EXERCISE 12-13 Cash flows from operating activities Cash receipts from Customers$240,000* Dividend revenue 18,000* ?258,000* Less cash payments: To suppliers for merchandise$105,000 For salaries and wages? 53,000 For operating expenses? 28,000 For income taxes? 12,000 For interest     Ã‚  10,000? 208,000* Net cash provided by operating activities$? 50,000* *$48,000 + $192,000 *EXERCISE 12-14 MOSQUITO HOLLOW CORP. Statement of Cash Flows—Direct Method For the Year Ended December 31, 2010Cash flows form operating activities Cash receipts from customers$566,100 Less: Cash payments: For goods and services$279,100 For income taxes93,000 For operating expenses77,000 For interest  Ã‚  Ã‚  Ã‚  22,400   471,500 Net cash provided by operating activities94,600 Cash flows form investing activities Sale of building202,400 Purchase of equipment  (113,200) Net cash provided by investing activities89,200 Cash flows from financing activities Issuance of common stock355,000 Payment of cash dividend (21,800) Purchase treasury stock(57,300) Cash paid to redeem bonds at maturity  (200,000) Net cash provided by financing activities  Ã‚  Ã‚   75,900 Net increase in cash259,700Cash at beginning of period  Ã‚  Ã‚  Ã‚  Ã‚  11,000 Cash at end of period$270,700 *EXERCISE 12-15 Cash payments for rentals Rent expense$ 30,000* Add: Increase in prepaid rent? ?3,100* Cash payments for rent$ 33,100* Cash payments for salaries Salaries expense$ 54,000* Add: Decrease in salaries payable? ?2,000* Cash payments for salaries$ 56,000* Cash receipts from customers Revenue from sales$160,000* Add: Decrease in accounts receivable 9,000* Cash receipts from customers$169,000* SOLUTIONS TO PROBLEMS |PROBLEM 12-1A | | | | |Cash Inflow, Outflow, or No Effect? | | | | | | |Transaction |Where Reported | | |(a) |Recorded depreciation |O |No cash flow effect | | |expense on the plant assets. | | | |(b) |Re corded and paid interest expense. |O |Cash outflow | |(c) |Recorded cash proceeds from a sale of plant assets. |I |Cash inflow | |(d) |Acquired land by issuing |NC |No cash flow effect | | |common stock. | | |(e) |Paid a cash dividend |F |Cash outflow | | |to preferred stockholders. | | | |(f) |Distributed a stock dividend |NC |No cash flow effect | | |to common stockholders. | | | |(g) |Recorded cash sales. |O |Cash inflow | |(h) |Recorded sales on account. O |No cash flow effect | |(i) |Purchased inventory for cash. |O |Cash outflow | |(j) |Purchased inventory on |O |No cash flow effect | | |account. | | | |PROBLEM 12-2A | (a)Net income can be determined by analyzing the retained earnings account. Retained earnings beginning of year$270,000 Add: Net income (plug) 60,500* 330,500 Less: Cash dividends20,000 Stock dividends 10,500 Retained earnings, end of year$300,000 ($300,000 + $10,500 + $20,000 – $270,000) (b)Cash inflow from the issue of stock was $14,500 ($165,000 à ¢â‚¬â€œ $140,000 – $10,500). Common Stock | |140,000 | | | |10,500 |Stock Dividend | | |14,500 |Shares Issued for Cash | | |165,000 | | Cash outflow for dividends was $20,000. The stock dividend does not use cash. c)Both of the above activities (issue of common stock and payment of dividends) would be classified as financing activities on the statement of cash flows. |PROBLEM 12-3A | GRIDER COMPANY Partial Statement of Cash Flows For the Year Ended November 30, 2010 Cash flows from operating activities Net income$1,650,000 Adjustments to reconcile net income to net cash provided by operating activities Depreciation expense$ 80,000 Decrease in inventory500,000 Decrease in accrued expenses payable  (100,000) Increase in prepaid expenses(150,000) Increase in accounts receivable(300,000) Decrease in accounts payable  (350,000)  Ã‚   (320,000) Net cash provided by operating activities$1,330,000 |*PROBLEM 12-4A | GRIDER COMPANYPartial Statement of Cash Flows For the Year End ed November 30, 2010 Cash flows from operating activities Cash receipts from customers$7,400,000(1) Less cash payments: To suppliers$4,750,000(2) For operating expenses? 1,320,000(3)? 6,070,000 Net cash provided by operating activities$1,330,000 Computations: (1)Cash receipts from customers Sales$7,700,000 Deduct: Increase in accounts receivable (300,000) Cash receipts from customers$7,400,000 (2)Cash payments to suppliers Cost of goods sold$4,900,000 Deduct: Decrease in inventories (500,000) Cost of purchases? 4,400,000 Add: Decrease in accounts payable 350,000 Cash payments to suppliers$4,750,000 3)Cash payments for operating expenses Operating expenses, exclusive of depreciation$1,070,000* Add: Increase in prepaid expenses$150,000 Decrease in accrued expenses payable100,000 250,000 Cash payments for operating expenses$1,320,000 *$450,000 + ($700,000 – $80,000) |PROBLEM 12-5A | JANTZEN COMPANY Partial Statement of Cash Flows For the Year Ended December 31, 2010 Cash fl ows from operating activities Net income$230,000 Adjustments to reconcile net income to net cash provided by operating activities Depreciation expense$70,000 Loss on sale of equipment16,000 Increase in accounts payable13,000Increase in income taxes payable 6,000 Increase in accounts receivable  (10,000) 95,000 Net cash provided by operating activities$325,000 |*PROBLEM 12-6A | JANTZEN COMPANY Partial Statement of Cash Flows For the Year Ended December 31, 2010 Cash flows from operating activities Cash receipts from customers$960,000(1) Less cash payments: For operating expenses$601,000(2) For income taxes 34,000(3)? 635,000 Net cash provided by operating activities$325,000 (1)Computation of cash receipts from customers Revenues$970,000 Deduct: Increase in accounts receivable ($70,000 – $60,000)? (10,000) Cash receipts from customers$960,000 2)Computation of cash payments for operating expenses Operating expenses per income statement$614,000 Deduct: Increase in accounts payable ($41,000 – $28,000)  Ã‚  Ã‚  (13,000) Cash payments for operating expenses$601,000 (3)Computation of cash payments for income taxes Income tax expense per income statement$ 40,000 Deduct: Increase in income taxes payable ($13,000 – $7,000)  Ã‚  Ã‚  Ã‚  Ã‚  (6,000) Cash payments for income taxes$ 34,000 |PROBLEM 12-7A | (a)TRAHAN COMPANY Statement of Cash Flows For the Year Ended December 31, 2010 Cash flows from operating activities Net income$32,000 Adjustments to reconcile net income o net cash provided by operating activities Depreciation expense$17,500* Increase in accounts payable? 9,000 Decrease in income taxes payable? (1,000) Increase in merchandise inventory(7,000) Increase in accounts receivable  (19,000)? (500) Net cash provided by operating activities31,500 Cash flows from investing activities Sale of equipment8,500 Cash flows from financing activities Issuance of common stock4,000 Redemption of bonds (6,000) Payment of dividends  (20,000 ) Net cash used by financing activities  (22,000) Net increase in cash18,000 Cash at beginning of period  Ã‚  20,000 Cash at end of period$38,000 *$32,000 – ($24,000 – $9,500(A)) = $17,500 A)$18,000 (cost of equipment) – $8,500 (book value) = $9,500 (accumulated depreciation for equipment sold) PROBLEM 12-7A (Continued) |(b) 1. |$31,500 |? |[pic] = 1. 17 times | | |[Per Part (a)] | | | *$15,000 + $8,000 **$24,000 + $7,000 2. $31,500 ? [pic] = . 55 times *$15,000 + $8,000 + $33,000 **$24,000 + $7,000 + $27,000 3. $31,500 – $0 – $20,000 = $11,500 |*PROBLEM 12-8A | (a)TRAHAN COMPANY Statement of Cash Flows For the Year Ended December 31, 2010 Cash flows from operating activitiesCash receipts from customers$223,000(1) Less cash payments: To suppliers$173,000(2) For operating expenses 6,500(3) For interest 3,000 For income taxes 9,000(4)? 191,500 Net cash provided by operating activities 31,500 Cash flows from investing activities Sale of equipmen t8,500 Cash flows from financing activities Issuance of common stock 4,000 Redemption of bonds (6,000) Payment of dividends? (20,000) Net cash used by financing activities? (22,000) Net decrease in cash 18,000 Cash at beginning of period 20,000 Cash at end of period$? 38,000 Computations: (1)Cash receipts from customers Sales$242,000 Deduct: Increase in accounts receivable  Ã‚  Ã‚  (19,000)Cash receipts from customers$223,000 *PROBLEM 12-8A (Continued) (2)Cash payments to suppliers Cost of goods sold$175,000 Add: Increase in inventory 7,000 Cost of purchases? 182,000 Deduct: Increase in accounts payable? ?9,000 Cash payments to suppliers$173,000 (3)Cash payments for operating expenses Operating expenses$24,000 Deduct: Depreciation $32,000 – ($24,000 – $9,500*)  Ã‚  17,500 Cash payments for operating expenses$ 6,500 *$18,000 – $8,500 = $9,500 (4)Cash payments for income taxes Income tax expense$8,000 Add: Decrease in income taxes payable 1,000 Cash payments for income taxes$9,000 |(b) 1. |$31,500 |? |[pic] = 1. 7 times | | |[Per Part (a)] | | | **$15,000 + $8,000 ***$24,000 + $7,000 2. $31,500 ? [pic] = . 55 times *$15,000 + $8,000 + $33,000 **$24,000 + $7,000 + $27,000 3. $31,500 – $0 – $20,000 = $11,500 |PROBLEM 12-9A | CIPRA INC. Statement of Cash Flows For the Year Ended December 31, 2010 Cash flows from operating activities Net income$158,900 Adjustments to reconcile net income to net cash provided by operating activities Depreciation expense$46,500Increase in accounts payable 34,700 Loss on sale of plant assets7,500 Decrease in accrued expenses payable (500) Increase in prepaid expenses? (2,400) Increase in inventory? (9,650) Increase in accounts receivable  (54,800)? 21,350 Net cash provided by operating activities? 180,250 Cash flows from investing activities Sale of plant assets1,500 Purchase of investments (24,000) Purchase of plant assets (100,000) Net cash used by investing activities(122,500) Cash flo ws from financing activities Sale of common stock45,000 Payment of cash dividends (30,350) Redemption of bonds (40,000) Net cash used by financing activities (25,350)Net increase in cash 32,400 Cash at beginning of period 48,400 Cash at end of period$? 80,800 |*PROBLEM 12-10A | CIPRA INC. Statement of Cash Flows For the Year Ended December 31, 2010 Cash flows from operating activities Cash receipts from customers$337,980(1) Less cash payments: To suppliers$110,410(2) For income taxes 27,280 For operating expenses 15,310(3) For interest 4,730? 157,730 Net cash provided by operating activities? 180,250 Cash flows from investing activities Sale of plant assets 1,500 Purchase of investments? (24,000) Purchase of plant assets (100,000) Net cash used by investing ? activities(122,500) Cash flows from financing activities Sale of common stock 45,000 Payment of cash dividends? (30,350) Redemption of bonds? (40,000) Net cash used by financing activities (25,350) Net increase in cash 32,40 0 Cash at beginning of period 48,400 Cash at end of period$? 80,800 Computations: (1)Cash receipts from customers Sales$392,780 Deduct: Increase in accounts receivable  Ã‚  Ã‚  (54,800) Cash receipts from customers$337,980 *PROBLEM 12-10A (Continued) (2)Cash payments to suppliers Cost of goods sold$135,460 Add: Increase in inventory 9,650 Cost of purchases? 145,110 Deduct: Increase in accounts payable? (34,700)Cash payments to suppliers$110,410 (3)Cash payments for operating expenses Operating expenses exclusive of depreciation$12,410 Add: Increase in prepaid expenses$2,400 Decrease in accrued expenses payable 500 2,900 Cash payment for operating expenses$15,310 |PROBLEM 12-11A | MERCADO COMPANY Statement of Cash Flows For the Year Ended December 31, 2010 Cash flows from operating activities Net income$ 37,000 Adjustments to reconcile net income to net cash provided by operating activities Depreciation expense$42,000 Decrease in accounts receivable? 12,000 Decrease in prepaid ex penses 5,720 Increase in accounts payable? ,730 Loss on sale of equipment2,000 Increase in inventory  Ã‚   (9,450)? 57,000 Net cash provided by operating activities? 94,000 Cash flows from investing activities Sale of land? 25,000 Sale of equipment? 8,000 Purchase of equipment(95,000) Net cash used by investing activities? (62,000) Cash flows from financing activities Payment of cash dividends  (12,000) Net cash used by financing activities  (12,000) Net increase in cash20,000 Cash at beginning of period? 45,000 Cash at end of period$65,000 Noncash investing and financing activities Conversion of bonds by issuance of common stock$40,000 |PROBLEM 12-12A | | | |Current Cash Debt Coverage | | | | | |Ratio |Cash Debt Coverage Ratio | | | |Free Cash Flow ($125,000) |(0. 5 times) |(0. 3 times) | | | | | | | | |Transaction | | | | |(a) |Recorded credit sales $2,500. |NE |NE |NE | |(b) |Collected $1,500 owing from customers. I |I |I | |(c) |Paid amount owing |D |D |D | | |to supp liers, $2,750. | | | | |(d) |Recorded sales returns of $500 and credited the |NE |NE |NE | | |customer’s account. | | | | |(e) |Purchased new equipment $5,000; signed a long-term |D* |NE |D | | |note payable for the cost of the equipment. | | | |(f) |Purchased a patent and paid $15,000 cash for the |D |NE |NE | | |asset. | | | | *Note to Instructor: If only cash capital expenditures are deducted, this answer would be NE. |BYP 12-1 FINANCIAL REPORTING PROBLEM | (a)Net cash provided by operating activities: 2007 $90,064 2006 $55,656Some causes of the significant changes in net cash provided by operating activities during 2007 were the decrease in the accounts receivable, a decrease in inventories, and a decrease in income taxes payable and deferred. (b)The increase in cash and cash equivalents for the year ended December 31, 2007 was $1,877,000. (c)Tootsie Roll uses the indirect method of computing and presenting the net cash provided by operating activities. (d)According to t he statement of cash flows, accounts receivable decreased $2,591,000 in 2007. Inventories decreased $6,506,000 in 2007. Accounts payable (and accrued liabilities) decreased $3,234,000 in 2007. (e)The net cash used by investing activities in 2007 was $43,345,000. (f)The supplemental disclosure of cash flow information disclosed interest paid of $537,000 and income taxes paid of $11,343,000 in 2007. BYP 12-2 COMPARATIVE ANALYSIS PROBLEM | |(a) | | | |Hershey | |Tootsie Roll | | | | | | | | | | |1. |Current cash | |[pic] | |[pic] | | | |debt coverage | |= . 51 times | |= 1. 0 times | | | |ratio | | | | | | | | | | | | | | |2. |Cash debt | |[pic] | |[pic]= . 54 times | | | |coverage ratio | |= . 22 times | | | **$57,972 + $116,523 **$62,211 + $98,747 (b)Tootsie Roll’s current cash debt coverage ratio provides a ratio of $1. 50 of cash from operations for every dollar of current debt.It is a better representation of liquidity on an average day than the current ratio. Tootsie Ro ll’s higher ratio (1. 50 vs. .51) indicates Tootsie Roll was significantly more liquid in 2007 than Hershey but both measures are acceptable. The cash debt coverage ratio shows a company’s ability to repay its liabilities from cash generated from operating activities without having to liquidate the assets employed in its operations. Since Tootsie Roll’s cash debt coverage ratio was more than twice as large (. 54 vs. .22) as Hershey’s, Tootsie Roll’s ability to repay liabilities with cash from operations was significantly greater than Hershey’s in 2007. BYP 12-3 RESEARCH CASE | (a)The article suggests that most people aren’t concerned about Sears’s liquidity. Instead, the concern is that the company won’t have adequate cash to implement the changes it needs to make a return to profitability. Also, some investors were concerned that a cash shortage will reduce Sears’s ability to carry out the treasury stock buyback program that it had previously announced. (b) At the time of the article, Sears had not reported its cash flow numbers. It had, however, reported an estimate that by the end of the quarter the company would have $1 billion in cash on hand. This was lower that analysts had expected.Based upon estimates of amounts that the company had spent on treasury stock, debt repayment, and capital expenditures, analysts determined that it was likely that, to arrive at $1 billion in cash on hand, the company’s cash flow must have declined. (c)Individuals who tried to defend Sears said that they thought it was inappropriate to make such negative statements about the company based on estimates. They suggested it would be better to wait until the company reports its actual cash flow numbers before evaluating the company. (d)The article suggests that, if, in fact, Sears’s cash flow is declining, it is a bad time of year for that to be happening. Normally the fourth quarter would be a p eriod when cash flows would be strong, because of the holiday shopping season.In contrast, Sears frequently experiences negative cash from operations during the first three quarters of the year. |BYP 12-4 INTERPRETING FINANCIAL STATEMENTS | (a)Current ratio—2001:$1,207. 9? $ 921. 4= 1. 31 —2004:$2,539. 4? $1,620. 4= 1. 57 Current cash debt ?coverage ratio—2001:($119. 8)? $ 948. 2= (. 13) times —2004: $566. 6? $1,436. 6= . 39 times Both Amazon’s current ratio and its current cash debt coverage ratio improved dramatically from 2001 to 2004. Amazon’s current ratio increased by 20% (from 1. 31 to 1. 57) during the 3-year period.In addition Amazon’s current cash debt coverage ratio improved by $. 52 per dollar of current liabilities (from a negative $. 13 per dollar in 2001 to a positive $. 39 per dollar in 2004). Amazon’s liquidity improved greatly from 2001 to 2004. (b)Cash debt ?coverage ratio—2001:($119. 8)? $3,090. 0= ( . 04) times —2004: $566. 6? $4,773. 4= . 12 times Debt to total ?assets ratio—2001:$3,077. 5? $1,637. 5= 1. 88 —2004:$5,096. 1? $3,248. 5= 1. 57 Amazon’s solvency also improved significantly from 2001 to 2004. Its cash debt coverage ratio increased by $. 16 per dollar of total liabilities during the 3-year period. Amazon’s debt to total assets ratio also improved (decreased) by 16% from 2001 to 2004. c)Free cash flow—2001:($119. 8)–$50. 3 – $0= ($170. 1) —2004: $566. 6–$89. 1 – $0= $477. 5 Amazon’s free cash flow increased by almost $650 million from 2001 to 2004. The increase was caused by Amazon finally generating a profit in 2004. If Amazon is able to continue operating at a profit and producing a large free cash flow, it should be able to finance an expansion of its operations. BYP 12-4 (Continued) (d)While these measures tell us a lot about Amazon. com, they don’t tell us whether the stoc k price is reasonable. Amazon. com’s high stock price is a reflection of a belief by investors that Amazon. com will continue to grow incredibly fast.If this growth falters, its stock price will fall rather quickly. Also, Amazon. com’s heavy reliance on debt financing compounds the risk of investing in its stock because it may have a difficult time paying its debts if its growth does not continue. |BYP 12-5 FINANCIAL ANALYSIS ON THE WEB | Answers will vary depending on the company chosen by the student. |BYP 12-6 DECISION MAKING ACROSS THE ORGANIZATION | (a)DEVITO COMPANY Statement of Cash Flows For the Year Ended January 31, 2010Cash flows from operating activities Net loss$(35,000)* Adjustments to reconcile net income to net cash provided by operating activities Depreciation expense$? 55,000 Gain from sale of investment? ?(5,000)50,000 Net cash provided by operating activities15,000 Cash flows from investing activities Sale of investment 80,000 Purchase of inves tment ? (75,000) Purchase of fixtures and equipment  (320,000) Net cash used by investing activities(315,000)* Cash flows from financing activities Sale of capital stock? 405,000 Purchase of treasury stock? (10,000) Net cash provided by financing activities395,000 Net increase in cash 95,000 Cash at beginning of period? 40,000 Cash at end of period$235,000 Noncash investing and financing activities Issuance of note for truck$20,000 BYP 12-6 (Continued) *Computation of net income (loss) Sales of merchandise$385,000 Interest revenue 6,000 Gain on sale of investm

Time Management Project Analysis - 1075 Words

The current process that is being improved upon is one which seeks to reduce the use of paper within the organization by becoming a more electronic company. This may cost money at the onset of the process improvement as resources will be needed to implement the necessary changes to enact the new processes. However, it will reduce the overall cost to the organization over the years and it will eliminate paper costs and other expenses associated with paper usage. There are a few resources needed to ensure the process has what it needs to be successful. First, to reduce paper a shared website or network must be created to give employees an operating platform to conduct their tasks electronically. Next, some of the managers will need to†¦show more content†¦Thus, 216 computers will need to be networked utilizing the new resources. The estimated set up of 20 users is $2500 (Walker, 2015). Although only one organization is being referenced this cost estimate is roughly the same with several other entities. The estimates, which are rounded up, of networking all the computers within the organization is $27,500. This will come with an additional server with storage ability of approximately $4000 (Walker, 2015). This leaves a total cost of $31,500 to update the current system and establish a network to reduce the use of paper. The project will be given the 6 month timeframe in order to have it completed by the end of the fiscal year and the installation will not require the company’s employees as the network set up cost are estimated from an outside contractor. Business will continue uninterrupted as the paper processes can continue until the network is established. Although this equipment is costly it has been found that setting up an organization to be more electronic can have long lasting, cost saving benefits (â€Å"Paper or Electronic†, 2003). 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