Weapons of Mass Destruction The Terrorist Threat

Introduction In 1945, the U.S. caused an extensive obliteration when it dropped two atomic bombs on the Japanese cities of Hiroshima and Nagasaki, which also ended the Second World War. This incident made the whole world to come to terms with the threat that weapons of mass destruction (WMD) pose to the world security.Advertising We will write a custom essay sample on Weapons of Mass Destruction: The Terrorist Threat specifically for you for only $16.05 $11/page Learn More Regrettably, as the major countries have agreed to stop the use of WMD, terror groups have made efforts to acquire and use them for causing havoc in various places around the world. Worse still, technological advancement of this century has increased the possibility of their construction and smuggling for illicit use in almost everywhere in the world. This paper provides an assessment on how a significant terrorist WMD attack can be conducted. Lacy and Benedek note, â€Å"WMD are used to kill large numbers of people, destroy large amounts of property, achieve political goals, and create terror, chaos, and social disruption† (2003, para. 2). They also say that the weapons include â€Å"biological or chemical agents, nuclear weapons, conventional bombs contaminated with radioactive materials, large conventional or â€Å"truck† bombs, and surprising sources such as hijacked airplanes† (Lacy and Benedek, para.2). Recent horrific incidences such as the Japanese subway attack using Sarin nerve agent, which resulted in the death of thirteen individuals and severely injured several others, have raised the alarm of the possible terrorist use of WMD. In addition, North Korea and other regimes such as Iran have issued threats of possible use of different biological and chemical weapons for causing widespread destruction. Therefore, their use by terrorist organizations is a cause of worry for many nations around the world. Chemical terrorism Chemical wea pons are made from chemical materials with toxic properties and they are meant to injure or incapacitate the enemy, or render a particular place unfit for productive use. Unlike conventional weapons or nuclear weapons, these dangerous weapons do not rely on explosive force to realize their goals; however, they rely on the unique characteristics of the chemicals in causing harm (Croddy Wirtz, 2005). In this century, approximately seventy different chemicals are available that can be used as chemical terrorism agents. During the First World War era, chemical weapons that were used were in the form of gases. In the modern era, however, terrorists can use liquids, solids, or gases having poisonous effects to cause mass casualties. Terrorists can either use persistent or non -persistent chemical weapons to cause destruction. Non-persistent agents, such as chlorine and sarin, stay for a limited period before losing their effectiveness after dissemination; therefore, this makes them to be beneficial for terrorists who want to take over and control a target as fast as possible. On the other hand, persistent agents stay for many days before losing effectiveness.Advertising Looking for essay on political sciences? Let's see if we can help you! Get your first paper with 15% OFF Learn More Chemical terrorism can be effected by use of agents that are organized into five different groups based on how they cause harm to the human body. The five categories are blister (vesicant), blood (systemic), choking, nerve, and psychotomimetric agents. Blister agents refer to the chemicals that cause extreme skin, eye, and mucosal pain and irritation resulting in large, aching blisters on parts of the body of those affected. The most common types of blister agents are sulfur mustards and lewisite, and they are heavier than air hence stay in the atmosphere for an extended period of time. Sulfur mustard is inexpensive and easy to manufacture, making it likely to be used by terrorists. The agents readily penetrate the skin causing life-threatening symptoms such as skin pain and irritation, large fluid blisters that are prone to infection, and mild respiratory distress. Since the blister agents are not as lethal as are the nerve agents, they are less likely to be employed by the terrorists. Blood agents, which are cyanide or arsenic based, get into the blood through inhalation or ingestion and cause death in a matter of minutes or seconds by inhibiting the conversion of oxygen into energy. At ambient conditions, the toxic chemical agents are volatile colorless gases, hence are more destructive when terrorists use them in confined areas. They are normally disseminated as aerosols and saturate the blood when inhaled. In order to be effective, terrorists can consider using higher doses of the blood agents that can cause symptoms of dizziness, weakness, and nausea on those affected. Permanent brain damage and muscle paralysis might also occur. A third type of chemical agent is a choking agent, which affect the victims breathing system by leading to a build-up of fluids in the lungs. The fluid-filled lungs render the affected individual unable to breathe and eventually suffocate. When the chemical agents are exposed to the eyes and skin, they corrode the surfaces leading to distorted vision and severe deep burns, and when they are inhaled, they cause multiple complications to the respiratory and the circulatory system. Even though some individuals can survive choking agent attacks, they end up suffering from life-long breathing problems. Currently, some of the choking agents that terrorists might use to achieve their objectives include chlorine gas, chloropicrin, diphosgene, phosgene, and trichloronitromethane.Advertising We will write a custom essay sample on Weapons of Mass Destruction: The Terrorist Threat specifically for you for only $16.05 $11/page Learn More Among these chemical weapon agents, moder n terrorists are likely to use phosgene since it is the most dangerous and since it is denser than air, it can remain in the air for a considerable amount of time. Chlorine is the most common and the degree of damage it causes depends on the level of contact one has with it. It is believed that modern terrorists can try to simulate the massive use of these weapons, which occurred during the First World War. For example, on April 22, 1915, the German forces opened up 168 tons of chlorine gas on their enemies at the Second Battle of Ypres in Belgium, which resulted in the death of many unprepared soldiers. The fourth type of chemical agents is the nerve agents, which attack the victim’s nervous system by restricting the movement of the nerve impulses in the body. Therefore, the affected persons are unable to control their muscles, vomit and lose the ability to control their bladder, lungs stop working and they lose their ability to breathe. Eventually, the victims die by asphyx iation as control of the respiratory muscles is lost due to the effects of the agent. A number of the deadly nerve agents are easily vaporized or aerosolized. They mainly enter the victim’s body through the respiratory system and they can also be absorbed through the skin. Since they are considered as some of the most powerful and lethal of all chemical weapons, they have the potential of causing mass casualties when used by terrorist organizations. Nerve agents fall into two classes: G-series, such as tabun and sarin, and V-series, such as VE, VG, and VM. The fifth type of chemical weapons is the psychotomimetic agents, which affects a person’s mind. They make the victim to develop complications in his or her nervous system and reduces his or her ability to make decisions or move. The person becomes disoriented and can have delusions. The types of this agent that terrorists can use include 3-quinuclidinylbenzilate, Phencyclidine, and LSD In order to achieve the intend ed goal of use of chemical weapons, terrorists must ensure that they are effectively delivered or disseminated to the targets since their effectiveness is highly dependent on the prevailing atmospheric conditions as many of them are in gaseous form. Inappropriate weather observations and forecasting reduces their effective delivery. The most probable forms of attack that terrorists might use are dispersion, thermal dissemination, and aerodynamic dissemination. Dispersion techniques, such as the use of munitions, bombs, and spray tanks, are the easiest form of attack since they involve putting the agent on or next to a target immediately before dissemination, with the intention of efficiently using the material. Terrorists can use this technique by opening a container full of poisonous substances in a place full of people, for example, in a city bus stop.Advertising Looking for essay on political sciences? Let's see if we can help you! Get your first paper with 15% OFF Learn More Thermal dissemination is a dispersal technique of chemical weapons by the use of explosives or pyrotechnics and it offers the advantage of disseminating the agent over a considerable distance. This may make it preferable to the terrorists over the dispersion technique. In disseminating the chemical agents, terrorists may use bombs or projectile shells, which expel the agent tangentially when detonation occurs. In spite of the limitations of the use of thermal dissemination devices, terrorists can efficiently use them in the early stages of chemical weapon development. Another delivery method is aerodynamic dissemination method in which a chemical weapon is released from an airplane without any explosion. Aerodynamic stress then spreads the agent to the targeted area. Today, terrorists can opt for this method over the thermal dissemination technique since it eliminates some of its limitations. In addition, the advances in technology have allowed ideal conditions to be predetermined b efore disseminating the chemicals through aerodynamics. Biological terrorism Biological terrorism refers to the deliberate use of pathogens such as bacteria, viruses, or toxins, to kill, incapacitate, or seriously cause extensive harm to a person or persons. The biological agents normally exist in nature, but terrorists may try to modify them in order to increase their ability of causing illness or death to individuals. They can also be made to be resistant to medications or easier to move from one place to another. The bioterrorism agents are spread through inanimate materials and they are not easy to detect when present in these means of dispersion. The agents can also take sometime, up to several days, before causing disease. Other significant attributes that make the bio-weapons attractive for terrorists include their ease of acquisition, ease of dissemination, and can cause mass panic and disruption of a society apart from the real harm they can cause. In the past, bioterrorist s have successfully used biological agents to cause harm to innocent people. For example, in 1993, a religious group in Japan tried to aerosolize anthrax spores in Tokyo but the attack was a total failure. Only one person was infected. And in late 2001, letters infected intentionally with anthrax were sent to news media and the United States Congress and resulted in the death of five people. These instances, and many others not mentioned, illustrate that terrorist organizations are ready to obtain and use biological weapons to cause mass casualties. The United States Center for Disease Control and Prevention (the CDC) has classified the biological weapons into three different categories based on the degree of danger that every agent can pose to the population. This also depicts how a significant bioterrorism attack can be conducted. Category A consists of high-priority agents that pose a significant risk to national security, â€Å"since they can be easily disseminated or transmitt ed from one person to the other, they have the ability of causing high deaths, are able to result in major public panic and social disruption, and need exceptional action for public health vigilance† (Friedewald, 2006, xxviii). The agents in this category are the ones that terrorists are likely to use for carrying out an attack and they consist of â€Å"tularemia, anthrax, smallpox, botulinum toxin, bubonic plague, and viral hemorrhagic fevers† (Porteus, 2006, para.9). Tularemia or rabbit fever is caused by a very infectious bacterium called Francisella tularensis, which causes fever, localized skin ulcerations, sore throat, systemic infection, and sometimes pneumonia. Infection to individuals is usually caused by breathing or intake of tainted food materials. Since Francisella tularensis widely occurs in nature, terrorists can isolate and grow it in large quantity in a laboratory for carrying out an attack. Anthrax is a non-communicable ailment caused when the spores o f the organism called Bacillus anthracis are inhaled into the lungs where they become active and multiply producing massive bleeding and swelling in the victim’s chest. The person then dies due to blood poisoning. As illustrated in the earlier sections of this paper, terrorists have attempted to use anthrax in several occasions. A highly notorious virus called variola causes smallpox and it is transmitted through the atmosphere from one infected person to the other. Smallpox has a high mortality rate of between twenty to forty percent. Although the World Health Organization declared its complete eradication in 1980, some cultures can still be found in Russia and the U.S. It is believed that the crumple of the Soviet Union made some nations to acquire virus samples of smallpox. This can fall in the hands of terrorists, which they can use to achieve their goals. Other significant threats as forms of biological warfare agents in this category include botulinum toxin and bubonic plague. Category B biological weapons consist of those that are second highest priority agents â€Å"since the terrorists find it moderately easy to disseminate, lead to moderate levels of ailment and low casualty rate, and need specific public-health action such as enhanced diagnostic and detection procedures† (Porteus, 2006, para. 10). Some of these agents or diseases include â€Å"brucellosis, food safety threats such as the Salmonella species, water supply threats such as vibrio cholerae, glanders, ricin, and Q fever† (Porteus, 2006, para. 10). Lastly, Category C is the third highest priority agents. They consist of emerging disease causing organisms that terrorists can modify for mass dissemination. This is because they are readily available, are fairly easy to manufacture and distribute, and are capable of causing mass casualties. Some of these agents or diseases include â€Å"nipah virus, yellow fever, the tickborne hemorrhagic fever, yellow fever, and tubercul osis† (Porteus, 2006, para. 11). Probable forms of attack by use of biological weapons exist, but the means of delivery depends on the target chosen and the extent of damage anticipated. The first means of dissemination that terrorists might use is through the air by aerosol sprays. To accomplish the intended goals, a biological weapon must be made airborne so that an individual can be able to inhale a sufficient quantity of the pathogens to cause disease and eventually death. Second, the biological agents can be delivered by use of explosive devices. However, this method is not as effective as aerosolizing the agents since some agents are damaged by the blast leaving about five percent of the agent to reach the intended target. Third, terrorists can deliver them by contaminating food or water. This can be done either at the source or at some point in the distribution process. Another way can be through direct human contact. For example, a number of ricin-tipped umbrellas have been employed in different assassination attempts. Lastly, biological agents can also be delivered indirectly by means of infected animals or inanimate objects. Nuclear terrorism Terrorists’ use of nuclear weapons is the most destructive of all weapons of mass destruction. It involves the terror groups acquisition and use or threat of use of nuclear weapons or materials whereby sustained fission reaction takes place (Cameron, 1999). This implies that nuclear terrorism is confined to the use of highly enriched uranium (HEU) or plutonium (Pu); nevertheless, some people use the term to allude to any type of terrorist weapon using radioactive materials, which involves the use of radiological dispersal devices (RDDs). Terror organizations, with the intention of causing mass casualties in a place, can employ RDDs materials, for example, cesium -137, strontium -90, and cobalt-60. These elements are readily available in several places around the world. A significant nuclear terroris m act can be conducted by the use of either of the two basic types of nuclear weapons: those that produce their explosive energy through nuclear fission reactions alone or through nuclear fusion reactions alone. Nuclear weapons that give out large quantity of energy by means of nuclear fission reactions are commonly called atomic bombs or atom bombs and their active material is enriched uranium or plutonium. Because of technological advances of this century, terrorists can easily manufacture them by use of either gun assembly or implosion method. The gun assembly method is whereby one piece of fissile uranium is fired into another so as to ignite an exponentially growing nuclear chain reaction. In the implosion method, either uranium or plutonium, or both, are compressed until they reach a critical mass. However, since this method is more complicated than the former, terrorists are less likely to use it in causing mass destruction. The second type of nuclear arsenal that terrorists can consider using is that which produces energy by means of nuclear fusion reactions and they are usually called thermonuclear weapons or hydrogen bombs. The bombs depend entirely on fusion reactions that take place involving the isotopes of hydrogen; though, they obtain a major part of their power from the ensuing fission reactions. In contrast to fission weapons, hydrogen bombs lack inherent limits to the energy they can produce, hence they are more powerful than the uranium- or plutonium-based fission bombs. In a typical thermonuclear weapon, the explosion of a fission bomb compacts and increases the temperature of lithium deuteride, resulting in the emission of neutrons, which strike the lithium atoms leading to the production of tritium. As the temperature of the fission reaction increases, tritium and deuterium are fused together leading to the production of helium and neutrons by both fission and fusion reactions. The reaction then continues through a series of chain reactio ns until it ends in an enormous explosion accompanied by a blast of neutron radiation. In addition to the two basic types of nuclear weapons, there are others that terrorists can consider using. Examples are the boosted fission weapon, which uses fusion reactions to enhance its efficiency, neutron bombs which can be specially designed to yield enormous quantity of neutron radiation, and â€Å"suitcase† bombs which are portable and could be about 48,000 cm3. The probable forms of attack that terrorists can use to deliver the nuclear weapons to their target include the use of gravity bombs, ballistic missiles, or cruise missiles. In order to successful, terrorists must consider the significant costs related to the delivery of nuclear weapons. Gravity bomb, whereby a bomber airplane is used to deliver the weapon, is the most traditional method of delivering nuclear weapons and it is much simpler since it does not offer limitations on the size of the weapon. On the other hand, it restricts the range of attack as well as the number of bombs that can be released. Currently, with the advancement in technology, terrorists can deliver nuclear weapons by the use of strategic bombers, with or without state sponsorship. Terrorists can increase the efficiency of delivering nuclear weapons to targets when they are mounted on missiles, which also lowers the chances of missile defense. Modern technologies, such as intercontinental ballistic missiles (ICBMs) and multiple independently targetable reentry vehicles (MIRVS) make the delivery of nuclear weapons possible in any part of the world with maximum accuracy. Cruise missiles have a shorter range and terrorists can target them to any place on the earth. Terrorists can prefer using cruise missiles to ballistic missiles because they are more difficult to detect and they have the ability of maneuvering anti-missile systems. Other potential terrorist forms of attack are the use of artillery shells and land mines. In addit ion to causing harm to individuals through their impact and detonation, nuclear weapons also affect individuals by the enormous quantity of radioactive material that they give out. The radiation can reach people through a number of ways. First, the radiation can reach the body of an individual when it is absorbed through an exposed portion of body parts such as the skin. Second, contamination takes place when radioactive substances gets into the atmosphere as minute particles and get inside the body of a person through the lungs, digestive system, or wounds on the skin. The radioactive substances can be in the form of solids, liquids, or gaseous particles. Lastly, body tissues and organs can be contaminated when they absorb gamma radiation, beta radiation, or alpha radiation. The contamination can occur before radiation drops to trace levels after an explosion has taken place. Radiological weapons Many atomic experts believe that terrorist organizations are likely to prefer using ra diological weapons in causing mass destruction. This is because, in contrast to nuclear bombs, they are able to spread radioactive substances over a wide area. This increases the possibility of causing destruction to people, animals, and infrastructure. A radiological weapon is principally referred to as a dirty bomb or salted bomb as it employs conventional explosives, such as wastes from nuclear power industries, to spread the deadly radioactive material. Because of these reasons, it is not recognized as a true nuclear bomb. Terrorist organizations can successfully employ radiological weapons for causing fear and death in an area with a large number of people. Because of the adverse effects of radiological weapons, they can make areas contaminated by radioactive dusts and smokes to be inhabitable for a considerable period, unless expensive decontamination efforts are carried out. Even though terrorists have not used radiological weapons before, previous incidences have raised the concern that terrorists may acquire and use them for causing mass casualties. For example, some radiological materials planted by Chen rebels were discovered and disarmed in 1995 and 1998. Moreover, some terrorist organizations, such as al Qaeda, have publicly expressed their willingness to acquire these weapons. Possible means of deployment of the radiological materials include the use of either radiological dispersal devices (RDD), which spreads the material into the environment, or radiological emission devices (RED), which uses an immobile radioactive source to make people come into contact with high levels of radiation. The source of RED can remain undiscovered for a considerable period of time such as the accident that took place in Goiania, Brazil in 1987 in which four people died and several others suffered from contamination effects. Terrorists’ use of RDD is likely to be more catastrophic, causing massive disruption and widespread panic among the population. If the RDD uses a chemical explosive, the preliminary outcome would come from the huge impact used to disperse the radioactive substance, and the radioactive fallout from this little â€Å"dirty bomb† would spread over a wide area. A â€Å"dirty bomb† is easily available to terrorists. It is a conventional chemical explosive laced with lower-grade radioactive substance that spreads when the bomb detonates, and it kills people through the initial impact as wells as through the resulting airborne radiation and contamination. Terrorists can deliver dirty bombs through various devices such as artillery shells, dynamite, and TNT. Radiological weapons can be employed in poisoning animals, aquatic life, and foodstuffs. Since they are not soluble in water, terrorists cannot poison water sources using them. Terror organizations can also launch a systemic attack in a nuclear plant. They can achieve this by overloading the reactor so that it functions as a radiological weapon. Potential terrorist targets The potential terrorist targets by the use of weapons of mass destruction are inexhaustible. If the chosen target will make the terrorist to realize his or her objectives, then is a viable quarry. Ideal targets may consist of, but not limited to, a place where there is large gatherings of individuals, packed stadiums, restaurants, office buildings, shopping malls, trains, subway systems, airliners, dams, oil refineries, seaports, nuclear power plants, and hazardous cargo on trucks and trains. It is important to note that terrorists may find some targets to be more attractive than others may be. For instance, a bus stop with no people may be less attractive to a terrorist than a full bus stop on a busy Monday. In using weapons of mass destruction, a terrorist is attracted to highly populated targets where many people can lose their lives and excessive damage on infrastructure can occur. The modern terrorist is usually attracted to symbolic targets; that is, places considered to be the might of a country. The September 11 attacks on the U.S. soil illustrate this. The terrorists destroyed the World Trade Center, which symbolized the economic strength of the U.S. and also represented the globalization that Muslim fundamentalists found to be so objectionable. Soft targets; that is, places that are poorly defended, also rank high on the modern terrorist’s target list. Examples are institutions of learning, hospitals, and shopping malls. These places are highly vulnerable to terrorists’ attack by the use of weapons of mass destruction since they lack adequate physical security necessary to deter terrorist. Conclusion To this end, it is clear that terrorists’ use of weapons of mass destruction is a major threat that must be countered in this century. Nevertheless, efforts can be made to counter its effects by adopting appropriate measures for prevention, detection, and action. Terrorism will not be completely obliterated from th e face of the earth if individuals settle down and stop making efforts to win the war that has been fought since the beginning of recorded history. This calls for establishment of drastic measures that can prevent them from obtaining or accessing chemical, biological, nuclear, or radiological weapons. Consequently, with the adoption of these counter strategies, the war on terror can be won significantly. Reference List Cameron, G. (1999). Nuclear terrorism : a threat assessment for the 21st century. New York: Palgrave Macmillan. Croddy, E., Wirtz, J. J. (2005). Weapons of mass destruction : an encyclopedia of  worldwide policy, technology, and history. Santa Barbara, Calif.: ABC-CLIO. Friedewald, V. (2006). Clinical guide to bioweapons and chemical agents. Notre Dame, Indiana: Springer Verlag. Lacy, T. K., Benedek, D. M. (2003, July). Terrorism and Weapons of Mass  Destruction: Managing the Behavioral Reaction in Primary Care. Medscape Today. Retrieved from https://www.medscap e.com/viewarticle/452845 Porteus, L. (2006, June). Weapons of Mass Destruction Handbook. Fox News. Retrieved from https://www.foxnews.com/ This essay on Weapons of Mass Destruction: The Terrorist Threat was written and submitted by user Madeleine U. to help you with your own studies. You are free to use it for research and reference purposes in order to write your own paper; however, you must cite it accordingly. You can donate your paper here.

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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. 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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