solman mas

7/25/2019 SOLMAN MAS

1/53

Chapter 16How Well Am I Doing?Statement of Cash Flows

Solutions to Questions

161 The purpose of a statement of cashows is to highlight the major activitiesthat have provided cash and that haveused cash during a period and to show theresulting eect on the overall cash

balance.

16! Cash equivalents are short-term,highly liquid investments such as treasurybills, commercial paper, and moneymaret funds. They are included with cashbecause investments of this type aremade solely for the purpose of generatinga return on funds that are temporarily idleand they can be easily converted to cash.

16" !"# $perating activities%Transactions that enter into the

determination of net income are generallyclassi&ed as operating activities. !'#(nvesting activities% Transactions that areinvolved in the acquisition or disposition ofnoncurrent assets are generally classi&edas investing activities. !)# *inancingactivities% Transactions !other than thepayment of interest# involving borrowingfrom creditors, and any transactions!e+cept for stoc dividends and stocsplits# involving the owners of a company,are generally classi&ed as &nancingactivities.

16# (nterest is included as an operatingactivity since it is part of net income.*inancing activities are narrowly de&ned toinclude only the principal amountborrowed or repaid.

16$ The gain is deducted from netincome to avoid double counting, since

the entire proceeds from the sale willappear as a cash inow from investingactivities.

166 Transactions involving accounts

payable are not considered to be &nancingactivities because such transactions relateto a companys day-to-day operatingactivities rather than to its &nancingactivities.

16% +amples of direct e+changesinclude issuing capital stoc in e+changefor property or equipment, convertinglong-term debt into common stoc, andacquiring property and equipment througha long-term lease. The eects of suche+changes are provided in a separate,

accompanying schedule to the statementof cash ows.

16& The repayment of )//,/// andthe borrowing of 0//,/// must both beshown 1gross2 on the statement of cashows. That is, the company would show0//,/// of cash provided by &nancingactivities and then show )//,/// of cashused by &nancing activities.

16' The direct method reconstructs theincome statement on a cash basis byrestating sales, e+penses, and all otherincome statement items in terms of cashinows and outows. The indirect methoddetermines the cash provided byoperating activities by starting with netincome and adjusting it to a cash basis.

161( 3epreciation is not a source ofcash. 4dding bac depreciation charges to

5 The 6c7raw-8ill Companies, (nc., '//). 4ll rights reserved.

9olutions 6anual, Chapter ": "/;


2/53

net income to compute the amount ofcash provided by operating activitiescreates the illusionthat depreciation is asource of cash. 4 company could double ortriple its depreciation charges, and therewould be no eect on the amount of cash

provided by operating activities. Chargesto the accumulated depreciation accountare added bac to net income since theyare equivalent to a decrease in an assetaccount.


3/53

)*er+ise 161 !"0 minutes#

TransactionOperatin

gInvestin

gFinancin

g Source Usea. 9hort-term investment securities were

purchased.............................................................E Eb. quipment was purchased...................................... E Ec. 4ccounts payable increased....................................E Ed. 3eferred ta+es decreased.......................................E Ee. Fong-term bonds were issued.................................. E Ef. Common stoc was sold.......................................... E Eg. 4 cash dividend was declared and paid................... E Eh. (nterest was paid to long-term creditors..................E Ei. 4 long-term mortgage was entirely paid o............ E E

j. (nventories decreased.............................................E E. The company recorded net income of "

million for the year...............................................E El. 3epreciation charges totaled '//,/// for

the year................................................................E Em. 4ccounts receivable increased................................E E


9olutions 6anual, Chapter "; "/G


4/53

)*er+ise 16! !"/ minutes#

Item Amount Add Deduct

4ccounts >eceivable

;/,/// decrease E

4ccrued (nterest >eceivable:,/// increase E

(nventory ""/,/// increase E?repaid +penses ),/// decrease E4ccounts ?ayable /,/// decrease E4ccrued Fiabilities G,/// increase E3eferred (ncome Ta+es "0,/// increase E9ale of equipment D,/// gain E9ale of long-term

investments "',/// loss E


""/ 6anagerial 4ccounting, "/th dition


5/53

)*er+ise 16" !"0 minutes#

@et income..............................................................D,///4djustments to convert net income to a cash

basis%

3epreciation charges for the year......................... 0/,///(ncrease in accounts receivable............................!:/,///#(ncrease in inventory............................................!;;,///#3ecrease in prepaid e+penses.............................. ',///(ncrease in accounts payable................................ )/,///3ecrease in accrued liabilities.............................. !,///#(ncrease in deferred income ta+es........................ :,///

@et cash provided by operating activities...............)",///


9olutions 6anual, Chapter "; """


6/53

)*er+ise 16# !"0 minutes#

9ales.......................................................................",///,//

/4djustments to a cash basis%

Fess increase in accounts receivable..................A :/,///G/,//

/

Cost of goods sold...................................................0D/,///4djustments to a cash basis%

?lus increase in inventory...................................B ;;,///Fess increase in accounts payable......................A )/,/// :';,///

$perating e+penses................................................)//,///4djustments to a cash basis%

Fess decrease in prepaid e+penses....................A ',///?lus decrease in accrued liabilities.....................B ,///Fess depreciation charges..................................A 0/,/// '0',///

(ncome ta+es...........................................................):,///4djustments to a cash basis%

Fess increase in deferred incometa+es................................................................ A :,/// )/,///

@et cash provided by operating activities...............

)",///

@ote that the )",/// agrees with the cash provided by operatingactivities &gure under the indirect method in the previouse+ercise.


""' 6anagerial 4ccounting, "/th dition


7/53

)*er+ise 16$ !'/ minutes#

8$FFI C$6?4@I9tatement of Cash *lows

*or the Iear nded 3ecember )", '//'

Operating activities:@et income.............................................................. '/4djustments to convert net income to a cash

basis%3epreciation charges for the year......................... "/(ncrease in accounts receivable............................ !;#(ncrease in inventory............................................ !"#

(ncrease in accounts payable................................ :@et cash provided by operating activities............... "0

Investing activities:4dditions to plant and equipment........................... !)/#@et cash used for investing activities...................... !)/#

Financing activities:(ncrease in common stoc....................................... '/Cash dividends........................................................ !D#@et cash provided by &nancing activities................ "'

@et decrease in cash............................................... !)#Cash, January ", '//'............................................. ;Cash, 3ecember )", '//'.......................................


9olutions 6anual, Chapter "; "")


8/53

)*er+ise 16$ !continued#

Khile not a requirement, a worsheet may be helpful.

ChangeSourceor Use?

Cash FlowEect

Ad!ust"ments

Ad!usted Eect

Classi"#cation

Assets $e%cept cash and cash e&uivalents'Current assets%

4ccounts receivable B; Lse A; A;$peratin

g

(nventory B" Lse A" A"$peratin

g@oncurrent assets%

?lant and equipment B)/ Lse A)/ A)/ (nvesting

(ia)ilities* Contra assets* and Stoc+holders, E&uit-Contra assets%

4ccumulateddepreciation B"/ 9ource B"/ B"/

$perating

Current liabilities%

4ccounts payable B: 9ource B: B:

$peratin

g9tocholders equity%

Common stoc B'/ 9ource B'/ B'/ *inancing>etained earnings%

@et income B'/ 9ource B'/ B'/$peratin

g3ividends AD Lse AD AD *inancing

Additional entries@one


"" 6anagerial 4ccounting, "/th dition


9/53

Total A ) A )


9olutions 6anual, Chapter "; ""0


10/53

)*er+ise 166!"0 minutes#

9ales.......................................................................0//4djustments to a cash basis%

(ncrease in accounts receivable.......................... A ; G)

Cost of goods sold...................................................)//4djustments to a cash basis%

(ncrease in inventory..........................................B"(ncrease in accounts payable............................. A : )/D

$perating e+penses................................................"D/4djustments to a cash basis%

3epreciation charges for the year......................A "/ ";/

@et cash provided by operating activities............... "0


"": 6anagerial 4ccounting, "/th dition


11/53

)*er+ise 16% !)/ minutes#

". @et income......................................................................... ;04djustments to convert net income to a cash basis%

3epreciation charges........................................................ /

3ecrease in accounts receivable...................................... "/(ncrease in inventory........................................................ !)/#3ecrease in prepaid e+penses.......................................... 0(ncrease in accounts payable........................................... '/3ecrease in accrued liabilities.......................................... !"/#(ncrease in ta+es payable................................................. "/(ncrease in deferred ta+es................................................ 0Foss on sale of long-term investments............................. 07ain on sale of land.......................................................... !/#

@et cash provided by operating activities........................... G/

'. 8>4F3 C$6?4@I9tatement of Cash *lows

Operating activities:@et cash provided by operating activities !see

above#.................................................................... G/

Investing activities:

?roceeds from sale of long-term investments...........

0?roceeds from sale of land........................................ ;/4dditions to long-term investments.......................... !'/#4dditions to plant M equipment................................. !"0/#@et cash used for investing activities........................ !00#

Financing activities:3ecrease in bonds payable....................................... !'/#(ncrease in common stoc........................................ /Cash dividends.......................................................... !)0#

@et cash used by &nancing activities........................ !"0#@et increase in cash !net cash ow#.......................... '/Cash balance, beginning........................................... "//Cash balance, ending................................................ "'/


9olutions 6anual, Chapter "; "";


12/53

)*er+ise 16% !continued#


ChangeSourceor Use?

CashFlowEect

Ad!ust"ments

Ad!ustedEect

Classi"#cation


4ccounts receivableA"/ 9ource B"/ B"/

$perating

(nventory B)/ Lse A)/ A)/$peratin

g

?repaid e+penses A0 9ource B0 B0$peratin

g@oncurrent assets%

Fong-term investmentsA)/ 9ource B)/ A0/ A'/ (nvesting

?lant and equipmentB"0/ Lse A"0/ A"0/ (nvesting

Fand A)/ 9ource B)/ A)/ / (nvesting


4ccumulateddepreciation B/ 9ource B/ B/

$perating


4ccounts payable B'/ 9ource B'/ B'/$peratin

g4ccrued liabilities A"/ Lse A"/ A"/ $peratin


""D 6anagerial 4ccounting, "/th dition


13/53

g

Ta+es payable B"/ 9ource B"/ B"/$peratin

g


9olutions 6anual, Chapter "; ""G


14/53

)*er+ise 16% !continued#

ChangeSourceor Use?

CashFlowEect

Ad!ust"ments

Ad!ustedEect

Classi"#cation

@oncurrent liabilities%Nonds payable A'/ Lse A'/ A'/ *inancing3eferred income ta+es

B0 9ource B0 B0 $perating9tocholders equity%

Common stoc B/ 9ource B/ B/ *inancing>etained earnings%

@et income B;0 9ource B;0 B;0 $perating3ividends A)0 Lse A)0 A)0 *inancing

Additional entries?roceeds from sale of

investments B0 B0 (nvestingFoss on sale of

investments B0 B0 $perating

?roceeds from sale ofland B;/ B;/ (nvesting7ain on sale of land A / A / $perating

Total B'/ / B'/


"'/ 6anagerial 4ccounting, "/th dition


15/53

)*er+ise 16& !"0 minutes#

9ales.......................................................................://4djustments to a cash basis%

3ecrease in accounts receivable........................B"/ :"/

Cost of goods sold...................................................'0/4djustments to a cash basis%

(ncrease in inventory..........................................B)/(ncrease in accounts payable.............................A '/ ':/

$perating e+penses................................................'D/4djustments to a cash basis%

3ecrease in prepaid e+penses............................ A03ecrease in accrued liabilities............................B"/3epreciation charges..........................................A / '0

(ncome ta+es........................................................... )/4djustments to a cash basis%

(ncrease in ta+es payable...................................A"/(ncrease in deferred ta+es.................................. A 0 "0

@et cash provided by operating activities............... G/


9olutions 6anual, Chapter "; "'"


16/53

,ro-lem 16'!'/ minutes#

TransactionOperatin

gInvestin

gFinancin

g

Source*Use* or.either

/eportedin

SeparateSchedule?

a. Nonds were retired by paying the

principal amount due............................................ E Lseb. quipment was purchased by givinga long-term note to the seller............................... @either Ies

c. (nterest was paid on a note,decreasing (nterest ?ayable..................................E Lse

d. 4ccrued ta+es were paid.........................................E Lsee. 4 long-term loan was made to a

supplier................................................................. E Lsef. (nterest was received on the long-

term loan in !e# above, reducing(nterest >eceivable...............................................E 9ource

g. Cash dividends were declared andpaid...................................................................... E Lse

h. 4 building was acquired ine+change for shares of thecompanys common stoc.................................... @either Ies

i. Common stoc was sold for cash toinvestors............................................................... E 9ource

j. quipment was sold for cash................................... E 9ource. quipment was sold in e+change for

a long-term note................................................... @either Iesl. Convertible bonds were converted @either Ies


"'' 6anagerial 4ccounting, "/th dition


17/53

into common stoc...............................................


9olutions 6anual, Chapter "; "')


18/53

,ro-lem 161( !)/ minutes#

". and '. 4T$@ C$6?4@I9tatement of Cash *lows


Operating activities:@et income.............................................................. 0:4djustments to convert net income to cash

basis%3epreciation charges..........................................'0(ncrease in accounts receivable..........................!D/#3ecrease in inventory........................................)0(ncrease in prepaid e+penses.............................!'#(ncrease in accounts payable.............................;0

3ecrease in accrued liabilities............................!"/#7ain on sale of investments...............................!0#Foss on sale of equipment..................................'(ncrease in deferred income ta+es...................... D

@et cash provided by operating activities..............."/

Investing activities:?roceeds from sale of long-term

investments.........................................................."'?roceeds from sale of equipment............................"D

4dditions to plant and equipment...........................!""/#@et cash used for investing activities......................!D/#

Financing activities:(ncrease in bonds payable.......................................'03ecrease in common stoc.....................................!/#Cash dividends........................................................!":#@et cash used for &nancing activities......................!)"#

@et decrease in cash...............................................!;#Cash balance, January ", '//'................................ ""

Cash balance, 3ecember )", '//'..........................


"' 6anagerial 4ccounting, "/th dition


19/53

,ro-lem 161( !continued#


ChangeSourceor Use?

Cash FlowEect

Ad!ust"ments

Ad!ustedEect

Classi"#cation


4ccounts receivableBD/ Lse AD/ AD/

$perating

(nventory A)0 9ource B)0 B)0$peratin

g

?repaid e+penses B' Lse A' A'$peratin

g@oncurrent assets%

?lant and equipmentBD/ Lse AD/ A)/ A""/ (nvesting

Fong-terminvestments A; 9ource B; A; / (nvesting

(ia)ilities* Contra assets* and Stoc+holders, E&uit-

Contra assets%4ccumulated

depreciation B"0 9ource B"0 B"/ B'0$peratin

gCurrent liabilities%

4ccounts payable B;0 9ource B;0 B;0$peratin

g

4ccrued liabilities A"/ Lse A"/ A"/$peratin

g


9olutions 6anual, Chapter "; "'0


20/53

,ro-lem 161( !continued#

ChangeSourceor Use?

Cash FlowEect

Ad!ust"ments

Ad!ustedEect

Classi"#cation

@oncurrent liabilities%Nonds payable B'0 9ource B'0 B'0 *inancing3eferred income ta+es

BD 9ource BD BD$peratin


Common stoc A/ Lse A/ A/ *inancing>etained earnings%

@et income B0: 9ource B0: B0:$peratin

g3ividends A": Lse A": A": *inancing


equipment B"D B"D (nvestingFoss on sale of

equipment B' B'$peratin

g

?roceeds from sale oflong-term investmentsB"' B"' (nvesting

7ain on sale of long-term investments A 0 A 0

$perating

Total A ; / A ;


"': 6anagerial 4ccounting, "/th dition


21/53

,ro-lem 1611 !)/ minutes#

". 9ales.......................................................................;0/4djustments to a cash basis%

(ncrease in accounts receivable..........................A D/ :;/

Cost of goods sold...................................................0/4djustments to a cash basis%

3ecrease in inventory........................................A)0(ncrease in accounts payable.............................A ;0 )/

$perating e+penses................................................'')4djustments to a cash basis%

(ncrease in prepaid e+penses.............................B'3ecrease in accrued liabilities............................B"/3epreciation charges..........................................A '0 '"/

(ncome ta+es...........................................................'4djustments to a cash basis%

(ncrease in deferred income ta+es......................A D ":

@et cash provided by operating activities............... "/


9olutions 6anual, Chapter "; "';


22/53

,ro-lem 1611 !continued#

'. 4T$@ C$6?4@I9tatement of Cash *lows

*or the Iear ended 3ecember )", '//'

Operating activities:

Cash received from customers................................:;

/Fess cash disbursements for%

Cost of merchandise sold......................................)/$perating e+penses..............................................'"/(ncome ta+es........................................................ ":

Total cash disbursements........................................ 0::@et cash provided by operating activities............... "/


investments.........................................................."'?roceeds from sale of equipment............................"D4dditions to plant and equipment...........................!""/#@et cash used for investing activities...................... !D/#

Financing activities:(ncrease in bonds payable.......................................'03ecrease in common stoc.....................................!/#

Cash dividends........................................................!":#@et cash used for &nancing activities...................... !)"#

@et decrease in cash............................................... !;#Cash balance, January ", '//'................................ ""Cash balance, 3ecember )", '//'..........................


"'D 6anagerial 4ccounting, "/th dition


23/53

,ro-lem 161! !0 minutes#

". and '.*$EN$>$ C$6?4@I

9tatement of Cash *lows

*or Iear '


@et income..............................................................

:),///4djustments to convert net income to cash

basis%3epreciation charges............................................ 0,///(ncrease in accounts receivable............................!;/,///#(ncrease in inventory............................................!D,///#

3ecrease in prepaid e+penses..............................G,///(ncrease in accounts payable................................0/,///3ecrease in accrued liabilities..............................!D,///#7ain on sale of equipment....................................!:,///#(ncrease in deferred income ta+es........................ ,/// !',///#

@et cash provided by operating activities............... )G,///

Investing activities:?roceeds from sale of equipment............................':,///Foan to 8arer Company.........................................!/,///#

4dditions to plant and equipment...........................!"0/,///

#

@et cash used for investing activities......................!":,///

#

Financing activities:(ncrease in bonds payable.......................................G/,///(ncrease in common stoc.......................................:/,///Cash dividends........................................................!)),///#@et cash provided by &nancing activities................ "";,///

@et decrease in cash............................................... !D,///#Cash balance, beginning of year............................. "G,///

Cash balance, end of year.......................................

"",///


9olutions 6anual, Chapter "; "'G


24/53

,ro-lem 161! !continued#

). The relatively small amount of cash provided by operatingactivities during the year was largely the result of a largeincrease in accounts receivable. !The large increase in

inventory was oset by a large increase in accounts payable.#6ost of the cash that was provided by operating activities waspaid out in dividends. The small amount that remained,combined with the cash provided by the issue of bonds and theissue of common stoc, was insuOcient to purchase a largeamount of equipment and mae a loan to another company. 4sa result, the cash on hand declined sharply during the year.


")/ 6anagerial 4ccounting, "/th dition


25/53



ChangeSourceor Use?

CashFlowEect

Ad!ust"ments

Ad!usted Eect

Classi"#cation

Assets $e%cept cash and cash e&uivalents'

Current assets%

4ccounts receivable B;/ Lse A;/ A;/$peratin

g

(nventory BD Lse AD AD$peratin

g

?repaid e+penses AG 9ource BG BG$peratin

g@oncurrent assets%

Foan to 8arerCompany B/ Lse A/ A/

(nvesting

?lant and equipment B"'/ Lse A"'/ A)/ A"0/(nvestin

g


4ccumulateddepreciation B)0 9ource B)0 B"/ B0

$perating


4ccounts payable B0/ 9ource B0/ B0/$peratin

g

4ccrued liabilities AD Lse AD AD$peratin

g


9olutions 6anual, Chapter "; ")"


26/53


ChangeSource or

Use?

CashFlowEect

Ad!ust"ments

Ad!usted Eect

Classi"#cation

@oncurrent liabilities%

Nonds payable BG/ 9ource BG/ BG/*inancin

g

3eferred income ta+es B 9ource B B$peratin


Common stoc B:/ 9ource B:/ B:/*inancin

g>etained earnings%

@et income B:) 9ource B:) B:)$peratin

g

3ividends A)) Lse A)) A))*inancin

g

Additional entries

?roceeds from sale ofequipment B': B': (nvesting7ain on sale of

equipment A : A :$peratin

g

Total A D / A D


")' 6anagerial 4ccounting, "/th dition


27/53

,ro-lem 161" !0 minutes#

". 9ales.......................................................................;//,///4djustments to a cash basis%

(ncrease in accounts receivable..........................A ;/,/// :)/,///

Cost of goods sold...................................................//,///4djustments to a cash basis%

(ncrease in inventory..........................................BD,///(ncrease in accounts payable.............................A 0/,/// )GD,///

$perating e+penses................................................'":,///4djustments to a cash basis%

3ecrease in prepaid e+penses............................A G,///3ecrease in accrued liabilities............................B D,///3epreciation charges..........................................A 0,/// ";/,///

(ncome ta+es...........................................................';,///4djustments to a cash basis%

(ncrease in deferred income ta+es......................A ,/// '),///

@et cash provided by operatingactivities............................................................... )G,///


9olutions 6anual, Chapter "; "))


28/53

,ro-lem 161" !continued#

'. *$EN$>$ C$6?4@I9tatement of Cash *lows

*or Iear '

Operating activities:Cash received from customers................................ :)/,///Fess cash disbursements for%

Cost of merchandise purchased............................)GD,///$perating e+penses..............................................";/,///(ncome ta+es........................................................ '),///

Total cash disbursements........................................ 0G",///@et cash provided by operating

activities............................................................... )G,///

Investing activities:?roceeds from sale of equipment............................':,///Foan to 8arer Company.........................................!/,///#4dditions to plant and equipment...........................!"0/,///#@et cash used for investing activities...................... !":,///#

Financing activities:(ncrease in bonds payable.......................................G/,///(ncrease in common stoc.......................................:/,///Cash dividends........................................................!)),///#

@et cash provided by &nancingactivities............................................................... "";,///

@et decrease in cash............................................... !D,///#Cash balance, beginning of year............................. "G,///Cash balance, end of year....................................... "",///


") 6anagerial 4ccounting, "/th dition


29/53

,ro-lem 161" !continued#

). The decline in cash is e+plainable largely by the companysinability to generate a signi&cant amount of cash fromoperating activities. @ote that the company generated only

)G,/// from operating activities, although net income was:),/// for the year. This small amount of cash generated isdue primarily to the buildup of accounts receivable. venthough an additional "0/,/// was obtained from bonds andcommon stoc !G/,/// B :/,/// P "0/,///#, the cashavailable was not suOcient to e+pand the plant, mae asubstantial loan to another company, and pay a large cashdividend. 4s a result, cash declined during the year.


9olutions 6anual, Chapter "; ")0


30/53

,ro-lem 161# !0 minutes#

". and '.4FF(3 ?>$3LCT9

9tatement of Cash *lows



@et income..............................................................

;/,///4djustments to convert net income to cash

basis%3epreciation charges............................................:/,///(ncrease in accounts receivable............................!G/,///#(ncrease in inventory............................................!0,///#

3ecrease in prepaid e+penses..............................D,///(ncrease in accounts payable................................0,///3ecrease in accrued liabilities..............................!;,///#7ain on sale of investments..................................!'/,///#Foss on sale of equipment....................................:,///(ncrease in deferred income ta+es........................ ),/// !G,///#

@et cash provided by operating activities............... '",///


investments..........................................................

0/,///?roceeds from sale of equipment............................,///

4dditions to plant and equipment...........................!'//,///

#

@et cash used for investing activities......................!"/:,///

#

Financing activities:(ncrease in bonds payable......................................."//,///3ecrease in common stoc.....................................!0,///#

Cash dividends........................................................!'D,///#@et cash provided by &nancing activities................ :;,///

@et decrease in cash............................................... !"D,///#Cash balance, January ", '//'................................ )),///


"0,///


"): 6anagerial 4ccounting, "/th dition


31/53

,ro-lem 161# !continued#

). 4lthough the company reported a large net income for theyear, a relatively small amount of cash was provided byoperating activities due to increases in both accounts

receivable and inventory. @ote particularly that operationsdidnt generate enough cash to even pay the cash dividends forthe year. 4lthough the company obtained cash from sales ofassets and an issue of bonds, this was not suOcient to coverthe cost of a '//,/// increase in plant and equipment for theyear. 6ore care should have been taen in planning this majorinvestment in plant assets. 4lso, the company should probablyget better control over its accounts receivable. !4lthoughinventory also increased during the year, this increase was

largely oset by the increase in accounts payable.#


9olutions 6anual, Chapter "; ");


32/53



ChangeSource or

Use?

CashFlowEect

Ad!ust"ments

Ad!usted Eect

Classi"#cation


Current assets%

4ccounts receivable BG/ Lse AG/ AG/$peratin

g

(nventory B0 Lse A0 A0$peratin

g

?repaid e+penses AD 9ource BD BD$peratin

g@oncurrent assets%

Fong-term investments A)/ 9ource B)/ A)/ / (nvesting?lant and equipment B""/ Lse A""/ AG/ A'// (nvesting


4ccumulateddepreciation B'/ 9ource B'/ B/ B:/

$perating


4ccounts payable B0 9ource B0 B0$peratin

g

4ccrued liabilities A; Lse A; A;$peratin

g


")D 6anagerial 4ccounting, "/th dition


33/53


ChangeSource or

Use?

CashFlowEect

Ad!ust"ments

Ad!usted Eect

Classi"#cation

@oncurrent liabilities%Nonds payable B"// 9ource B"// B"// *inancing

3eferred income ta+es B) 9ource B) B)$peratin


Common stoc A0 Lse A0 A0 *inancing>etained earnings%

@et income B;/ 9ource B;/ B;/$peratin

g3ividends A'D Lse A'D A'D *inancing


long-term investments B0/ B0/ (nvesting7ain from sale of

investments A'/ A'/

$peratin

g?roceeds from sale ofequipment B B (nvesting

Foss on sale ofequipment B: B:

$perating

Total A "D / A "D


9olutions 6anual, Chapter "; ")G


34/53

,ro-lem 161$ !)/ minutes#

". 9ales.......................................................................D//,///4djustments to a cash basis%

(ncrease in accounts receivable..........................A G/,///

;"/,//

/

Cost of goods sold...................................................0//,///4djustments to a cash basis%

(ncrease in inventory..........................................B0,///(ncrease in accounts payable.............................A 0,/// 0/G,///

$perating e+penses................................................'",///4djustments to a cash basis%

3ecrease in prepaid e+penses............................A D,///3ecrease in accrued liabilities............................B ;,///3epreciation charges..........................................A :/,/// "0),///

(ncome ta+es...........................................................)/,///4djustments to a cash basis%

(ncrease in deferred income ta+es......................A ),/// ';,///

@et cash provided by operatingactivities...............................................................

'",///


"/ 6anagerial 4ccounting, "/th dition


35/53

,ro-lem 161$ !continued#

'. 4FF(3 ?>$3LCT99tatement of Cash *lows



Cash received from customers................................;"/,//

/Fess cash disbursements for%

Cost of merchandise purchased............................0/G,///$perating e+penses.............................................."0),///(ncome ta+es........................................................ ';,///

Total cash disbursements........................................ :DG,///@et cash provided by operating activities............... '",///


investments..........................................................0/,///?roceeds from sale of equipment............................,///4dditions to plant and equipment...........................!'//,///#

@et cash used for investing activities......................!"/:,///

#

Financing activities:(ncrease in bonds payable......................................."//,///

3ecrease in common stoc.....................................!0,///#Cash dividends........................................................!'D,///#@et cash provided by &nancing activities................ :;,///

@et decrease in cash............................................... !"D,///#Cash balance, January ", '//'................................ )),///


"0,///


9olutions 6anual, Chapter "; ""


36/53

,ro-lem 1616 !0 minutes#

Nefore the statement of cash ows can be prepared, we must &rstdetermine the following amounts%

The gain on sale of equipment.The cost of plant and equipment purchased during the year.The depreciation charges for the year.The net income for the year.

The computations follow%

?lant and quipment 4ccumulated 3epreciationNal.

',D0/,/// G;0,///

Nal.

!'#0//,///

":/,///

!"# !"# "0,/// '"/,///

!)#

Nal.

),"G/,///

",//,///

Nal.

+planation of entries%

!"# The entry to record the sale of equipment%

Cash........................................................................)0,///4ccumulated 3epreciation......................................"0,///

?lant and quipment..........................................":/,///7ain on 9ale of quipment.................................'/,///

!'# The balancing entry to record the plant and equipmentpurchased during the year !0//,///#.

!)# The balancing entry to record the depreciation charges forthe year !'"/,///#.

The companys >etained arnings account increased by ;0,///and cash dividends totaled "/,/// for the year. Therefore, thenet income for the year must have been% ;0,/// B "/,/// P

D0,///.


"' 6anagerial 4ccounting, "/th dition


37/53


7iven the amounts above, the statement of cash ows would beas follows%

346$CF9 C$6?4@I9tatement of Cash *lows

*or the Iear


@et income..............................................................

D0,///4djustments to convert net income to cash

basis%3epreciation charges............................................'"/,///

(ncrease in accounts receivable............................!";/,///#3ecrease in inventory...........................................:),///(ncrease in prepaid e+penses................................!,///#(ncrease in accounts payable................................D,///3ecrease in accrued liabilities..............................!0,///#7ain on sale of equipment....................................!'/,///#4dd increase in deferred income ta+es................. G,/// ")",///

@et cash provided by operating activities............... '":,///


3ecrease in long-term loan to subsidiary................ D/,///?roceeds from sale of equipment............................)0,///4dditions to long-term investments.........................!G/,///#4dditions to plant and equipment...........................!0//,///#

@et cash used for investing activities......................!;0,///

#

Financing activities:(ncrease in bonds payable.......................................'//,///(ncrease in common stoc.......................................)//,///

3ecrease in preferred stoc....................................!"D/,///#Cash dividends........................................................!"/,///#@et cash provided by &nancing activities................ )"/,///

@et increase in cash................................................ 0",///Cash balance, beginning......................................... "/G,///

Cash balance, ending..............................................":/,//

/


9olutions 6anual, Chapter "; ")


38/53



ChangeSourceor Use?

CashFlowEect

Ad!ust"ments

Ad!ustedEect

Classi"#cation


Current assets%4ccounts receivable

B";/ Lse A";/ A";/$peratin

g

(nventory A:) 9ource B:) B:)$peratin

g

?repaid e+penses B Lse A A$peratin

g@oncurrent assets%

Fong-term loans AD/ 9ource BD/ BD/ (nvestingFong-term investments

BG/ Lse AG/ AG/ (nvesting?lant and equipment

B)/ Lse A)/ A":/ A0// (nvesting(ia)ilities* Contra assets* and Stoc+holders, E&uit-Contra assets%

4ccumulateddepreciation B:0 9ource B:0 B"0 B'"/

$perating


4ccounts payable BD 9ource BD BD$peratin

g4ccrued liabilities A0 Lse A0 A0 $peratin


" 6anagerial 4ccounting, "/th dition


39/53

g


9olutions 6anual, Chapter "; "0


40/53


ChangeSourceor Use?

CashFlowEect

Ad!ust"ments

Ad!ustedEect

Classi"#cation

@oncurrent liabilities%Nonds payable B'// 9ource B'// B'// *inancing3eferred income ta+es

BG 9ource BG BG $perating9tocholders equity%

?referred stoc A"D/ Lse A"D/ A"D/ *inancingCommon stoc B)// 9ource B)// B)// *inancing>etained earnings%

@et income BD0 9ource BD0 BD0$peratin

g3ividends A"/ Lse A"/ A"/ *inancing


equipment B)0 B)0 (nvesting

7ain on sale ofequipment A '/ A '/ $perating

Total B0" / B0"


": 6anagerial 4ccounting, "/th dition


41/53

,ro-lem 161% !;0 minutes#

". 9ee the worsheet at the end of the solution.

'. 4FC$>@ ?>$3LCT9

9tatement of Cash *lows*or the Iear nded 3ecember )", '//'

Operating activities:@et income.............................................................. ";/,///4djustments to convert net income to cash

basis%3epreciation charges............................................G0,///4mortiQation of goodwill.......................................:,///

(ncrease in accounts receivable............................

!"D/,///

#3ecrease in inventory..........................................."',///(ncrease in prepaid e+penses................................!0,///#(ncrease in accounts payable................................)//,///3ecrease in accrued liabilities..............................!";,///#7ain on sale of long-term investments.................!:/,///#Foss on sale of equipment....................................'/,///(ncrease in deferred income ta+es........................"0,/// "D:,///

@et cash provided by operating activities............... )0:,///


investments..........................................................""/,//

/?roceeds from sale of equipment............................;/,///Foans to subsidiaries...............................................!0/,///#

4dditions to plant and equipment...........................!;//,///

#@et cash used for investing activities...................... !0;/,///#


9olutions 6anual, Chapter "; ";


42/53

,ro-lem 161% !continued#

Financing activities:(ncrease in long-term notes.....................................://,///(ncrease in common stoc.......................................G/,///

>etire long-term notes.............................................!)D/,///

#Cash dividends to stocholders...............................!;0,///#@et cash provided by &nancing activities................ ')0,///

@et increase in cash and cash equivalents.............. '",///Cash balance, January ", '//'................................ 0/,///Cash balance, 3ecember )", '//'.......................... ;",///


"D 6anagerial 4ccounting, "/th dition


43/53


). The large amount of cash provided by operating activities istraceable for the most part to the )//,/// increase inaccounts payable. (f the accounts payable had remained

basically unchanged, the same as inventory, then operatingactivities would have provided very little cash and the companymight have e+perienced serious cash problems.

@ote particularly that the cash provided by operating activitieswas used to purchase plant and equipment. Thus, the companyis using cash derived from a short-term source !buildup ofaccounts payable# to &nance long-term asset acquisitions. (nshort, although the company is generating substantial cashfrom operating activities, the &ualit-of this source is open to

question.(n the companys &nancing activities, it appears that long-termdebt sources, rather than equity sources, are being used toprovide for e+pansion. 4lthough companies frequently use debtto &nance e+pansion, the level of debt in this company isincreasing rapidly. !9ee Chapter "; for a discussion of the 3ebt-to-quity ratio and other &nancial ratios.#


9olutions 6anual, Chapter "; "G


44/53


ChangeSourceor Use?

CashFlowEect

Ad!ust"ments

Ad!ustedEect

Classi"#cation


4ccounts receivableB"D/ Lse A"D/ A"D/ $perating

(nventory A"' 9ource B"' B"' $perating?repaid e+penses B0 Lse A0 A0 $perating

@oncurrent assets%Fong-term investments

A0/ 9ource B0/ A0/ /Foans to subsidiaries

B0/ Lse A0/ A0/ (nvesting?lant and equipment

B0;/ Lse A0;/ A")/ A;// (nvesting7oodwill A: 9ource B: B: $perating

(ia)ilities* Contra assets* and Stoc+holders, E&uit-Contra assets%4ccumulated

depreciation B00 9ource B00 B/ BG0 $peratingCurrent liabilities%

4ccounts payable B)// 9ource B)// B)// $perating4ccrued liabilities A"; Lse A"; A"; $perating


"0/ 6anagerial 4ccounting, "/th dition


45/53


ChangeSourceor Use?

CashFlowEect

Ad!ust"ments

Ad!ustedEect

Classi"#cation

@oncurrent liabilities%Fong-term notes B''/ 9ource B''/ B)D/ B:// *inancing3eferred income ta+es

B"0 9ource B"0 B"0 $perating9tocholders equity%

Common stoc BG/ 9ource BG/ BG/ *inancing>etained earnings%

@et income B";/ 9ource B";/ B";/ $perating3ividends A;0 Lse A;0 A;0 *inancing

Additional entries>etire long-term notes

A)D/ A)D/ *inancing?roceeds from sale of

equipment B;/ B;/ (nvesting

Foss on sale ofequipment B'/ B'/ $perating?roceeds from sale of

long-term investmentsB""/ B""/ (nvesting

7ain on sale of long-term investments A :/ A :/ $perating

Total B'" / B'"


9olutions 6anual, Chapter "; "0"


46/53

,ro-lem 161&!)/ minutes#

9ales.......................................................................),///,///4djustments to a cash basis%

(ncrease in accounts receivable..........................A "D/,/// ',D'/,///

Cost of goods sold...................................................",D:/,///4djustments to a cash basis%

3ecrease in inventory........................................A"',///(ncrease in accounts payable.............................A )//,/// ",0D,///

$perating e+penses................................................G)/,///4djustments to a cash basis%

(ncrease in prepaid e+penses.............................B0,///3ecrease in accrued liabilities............................B";,///3epreciation charges..........................................AG0,///7oodwill amortiQation......................................... A :,/// D0",///

(ncome ta+ e+pense................................................D/,///4djustments to a cash basis%

(ncrease in deferred income ta+es......................A "0,/// :0,///

@et cash provided by operatingactivities............................................................... )0:,///


"0' 6anagerial 4ccounting, "/th dition


47/53

,ro-lem 161' !:/ minutes#

Nefore the statement of cash ows can be prepared, we must &rstdetermine the following amounts%

a. The gain or loss on sale of equipment.b. The cost of plant and equipment purchased during the year.c. The depreciation charges for the year.d. The gain or loss on sale of long-term investments.e. The net income for the year.

Computations 0or items a* )* and c:

?lant and quipment 4ccumulated 3epreciationNal. 0//,/// '//,///

Nal.

!'#'/,///

"'/,///

!"# !"#;/,/// ""/,///

!)#

Nal. :'/,/// '/,///

Nal.

+planation of entries%

!"# The entry to record the sale of equipment%

Cash......................................................................../,///

4ccumulated 3epreciation......................................;/,///Foss on 9ale of quipment......................................"/,///?lant and quipment.........................................."'/,///

!'# The balancing entry to record the plant and equipmentpurchased during the year !'/,///#.

!)# The balancing entry to record the depreciation charges forthe year !""/,///#.


9olutions 6anual, Chapter "; "0)


48/53

,ro-lem 161'!continued#

Computation 0or item d:

The entry to record the sale of long-term investments%

Cash........................................................................D/,///Fong-Term (nvestments.......................................:/,///7ain on 9ale of (nvestments...............................'/,///

Computation 0or item e:

*or the net income &gure, the companys >etained arningsaccount increased by 0,/// during the year and cashdividends totaled )0,/// for the year. Therefore, net incomemust have been% 0,/// B )0,/// P D/,///.


"0 6anagerial 4ccounting, "/th dition


49/53

,ro-lem 161'!continued#

7iven the amounts above, the statement of cash ows for lastyear follows%

FL4@7 C$>?.9tatement of Cash *lows*or the ?ast Iear

Operating activities:@et income.............................................................. D/,///4djustments to convert net income to cash

basis%3epreciation charges............................................""/,///(ncrease in accounts receivable............................!'/,///#3ecrease in inventory...........................................:/,///(ncrease in prepaid e+penses................................!"/,///#(ncrease in accounts payable................................)/,///(ncrease in ta+es payable....................................."/,///(ncrease in accrued liabilities................................"/,///Foss on sale of equipment...................................."/,///7ain on sale of long-term investments.................!'/,///#3ecrease in deferred income ta+es....................... !0,///# ";0,///

@et cash provided by operating activities............... '00,///


?roceeds from sale of equipment............................ /,///?roceeds from sale of long-term

investments..........................................................D/,///4dditions to long-term investments.........................!""/,///#4dditions to plant and equipment...........................!'/,///#@et cash used for investing activities...................... !')/,///#

Financing activities:3ecrease in bonds payable.....................................!/,///#(ncrease in common stoc.......................................'/,///

Cash dividends........................................................!)0,///#@et cash used for &nancing activities...................... !00,///#

@et decrease in cash............................................... !)/,///#Cash balance, beginning of the year....................... "//,///Cash balance, end of the year................................. ;/,///


9olutions 6anual, Chapter "; "00


50/53

,ro-lem 161' !continued#


ChangeSourceor Use?

CashFlowEect

Ad!ust"ments

Ad!ustedEect

Classi"#cation


4ccounts receivableB'/ Lse A'/ A'/

$perating

(nventory A:/ 9ource B:/ B:/$peratin

g

?repaid e+penses B"/ Lse A"/ A"/$peratin

g@oncurrent assets%

Fong-term investmentsB0/ Lse A0/ A:/ A""/ (nvesting

?lant and equipmentB"'/ Lse A"'/ A"'/ A'/ (nvesting

(ia)ilities* Contra assets* and Stoc+holders, E&uit-Contra assets%4ccumulated

depreciation B/ 9ource B/ B;/ B""/$peratin

gCurrent liabilities%

4ccounts payable B)/ 9ource B)/ B)/$peratin

g

4ccrued liabilities B"/ 9ource B"/ B"/$peratin

g


"0: 6anagerial 4ccounting, "/th dition


51/53

Ta+es payable B"/ 9ource B"/ B"/$peratin

g


9olutions 6anual, Chapter "; "0;


52/53

,ro-lem 161' !continued#

ChangeSourceor Use?

CashFlowEect

Ad!ust"ments

Ad!ustedEect

Classi"#cation

@oncurrent liabilities%Nonds payable A/ Lse A/ A/ *inancing3eferred income ta+es

A0 Lse A0 A0 $perating9tocholders equity%

Common stoc B'/ 9ource B'/ B'/ *inancing>etained earnings%

@et income BD/ 9ource BD/ BD/ $perating3ividends A)0 Lse A)0 A)0 *inancing


equipment B/ B/ (nvestingFoss on sale of

equipment B"/ B"/$peratin

g

?roceeds from sale oflong-term investmentsBD/ BD/ (nvesting

7ain on sale of long-term investments A '/ A '/

$perating

Total A )/ / A )/


"0D 6anagerial 4ccounting, "/th dition


53/53

.roup )*er+ise 16!(

The answer to this group e+ercise depends on the particularannual report the students select.

Karning% This assignment is very diOcult and should be assignedonly to the most capable students who are resourceful, analytical,and not easily frustrated.

solman mas

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