Aero Inc. had the following balance sheet at December 31, 2011.

Aero Inc. had the following balance sheet at December 31, 2011.

                                                AERO INC

                             Balance Sheet, December 31 2011                      

Cash                               $20,000       Accounts Payable           $30,000

Accounts Receivable       21,200         Bond Payable                  41,000

Investments                    32,000         Common Stock               100,000

Plant Assets (net)           81,000         Retained earnings           23,200

Land                               40,000                                                $194,200

                                      $194,200

During 2012, the following occurred.

1. Aero liquidated its available-for-sale investment portfolio at a loss of $5,000.

2. A tract of land was purchased for $38,000.

3. An additional $30,000 in common stock was issued at par.

4. Dividends totaling $10,000 were declared and paid to stockholders.

5. Net income for 2012 was $35,000, including $12,000 in depreciation expense.

6. Land was purchased through the issuance of $30,000 in additional bonds.

7. At December 31, 2012, Cash was $70,200, Accounts Receivable was $42,000, and Accounts Payable was $40,000.

Instructions

(a) Prepare a statement of cash flows for the year 2012 for Aero.

(b) Prepare the balance sheet as it would appear at December 31, 2012.

(c) Compute Aero’s free cash flow and the current cash debt coverage ratio for 2012.

(d) Use the analysis of Aero to illustrate how information in the balance sheet and statement of cash flows helps the user of the financial statements.

(a)

AERO INC.
Statement of Cash Flows
For the Year Ended December 31, 2012
Cash flows from operating activities
Net income..................................................................................		$35,000
Adjustments to reconcile net income to          net cash provided by operating activities
Depreciation expense.........................................................	$12,000
Loss on sale of investments..............................................	5,000
Increase in accounts payable                   ($40,000 – $30,000)......................................................	10,000
Increase in accounts receivable                   ($42,000 – $21,200)......................................................	(20,800)	6,200
Net cash provided by operating activities..............................		41,200
Cash flows from investing activities
Sale of investments...................................................................	27,000
Purchase of land.......................................................................	(38,000)
Net cash used by investing activities.....................................		(11,000)
Cash flows from financing activities
Issuance of common stock......................................................	30,000
Payment of cash dividends.....................................................	(10,000)
Net cash provided by financing activities..............................		20,000
Net increase in cash.......................................................................		50,200
Cash at beginning of year.............................................................		20,000
Cash at end of year.........................................................................		$70,200

Noncash investing and financing activities

      Land purchased through issuance of $30,000 of bonds

(b)

AERO INC.
Balance Sheet
December 31, 2012
Assets			Liabilities and Stockholders’ Equity
Cash	$  70,200			Accounts payable	$  40,000
Accounts   receivable	42,000			Bonds payable Common stock	71,000 130,000	(3) (4)
Plant assets (net)	69,000	(1)		Retained earnings	48,200	(5)
Land	108,000	(2)			$289,200
	$289,200

(1)  $81,000 – $12,000

(2)  $40,000 + $38,000 + $30,000

(3)  $41,000 + $30,000

(4)  $100,000 + $30,000

(5)  $23,200 + $35,000 – $10,000

(c)        An analysis of Aero’s free cash flow indicates it is negative as shown below:

Free Cash Flow Analysis
Net cash provided by operating activities......................................................		$41,200
Less:     Purchase of land.................................................................................		38,000
Dividends..............................................................................................		10,000
Free cash flow....................................................................................................		$ (6,800)

Its current cash debt coverage is 1.18 to 1  (41,200/*35,000)Overall, it appears that its liquidity position is average and overall financial flexibility should be improved.

*($30,000 + $40,000) ÷ 2

(d)       This type of information is useful for assessing the amount, timing, and uncertainty of future cash flows. For example, by showing the specific inflows and outflows from operating activities, investing activities, and financing activities, the user has a better understanding of the liquidity and financial flexibility of the enterprise. Similarly, these reports are useful in providing feedback about the flow of enterprise resources. This information should help users make more accurate predictions of future cash flow. In addition, some individuals have expressed concern about the quality of the earnings because the measurement of the income depends on a number of accruals and estimates which may be somewhat subjective. As a result, the higher the ratio of cash provided by operating activities to net income, the more comfort some users have in the reliability of the earnings.