Reporting and Analyzing Cash Flows QUESTIONS

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1 Chapter 12 Reporting and Analyzing Cash Flows QUESTIONS 1. The purpose of the cash flow statement is to report all major cash receipts (inflows) and cash payments (outflows) during a period. It helps users to answer questions such as: How does a company obtain its cash? Where does a company spend its cash? What explains the change in the cash balance? 2. On a statement of cash flows, investing activities include cash outflows from purchases of long-term investments such as stocks and bonds, from purchases of plant assets such as land, buildings, and machinery, and from purchases of other noncurrent assets such as natural resources and intangible assets. When these types of assets are sold, the cash inflows from the sales are also reported as investing activities. 3. On a statement of cash flows, financing activities include cash inflows such as those that result from issuing preferred or common stock, and from borrowing by issuing bonds or signing long-term or short-term notes payable. Financing activities also include cash outflows such as dividend payments to stockholders, purchases of treasury stock, and repayments of debt. 4. The direct method of reporting cash flows from operating activities itemizes the major classes of cash receipts such as sales to customers, and also itemizes the major classes of cash payments such as for merchandise, interest, taxes, and other operating expenses. 5. On a statement of cash flows prepared according to the direct method, operating activities generally include cash receipts from the sale of goods and services, cash dividends received from stock investments in other entities, and interest on loans to others. Operating activities also include cash outflows such as payments for merchandise, salaries, rent, income taxes, utilities, and other operating expense items. 6. The indirect method of reporting cash flows from operating activities begins with net income and then adjusts it for items that are necessary to reconcile net income to the net cash provided or used by operating activities. 7. Payments of cash dividends should be reported on the statement of cash flows as financing activities. 8. The amount of the land purchase that was paid for in cash ($400,000) should be reported on the statement of cash flows as an investing activity. Also, a schedule of noncash investing and financing activities or the notes to the statement should show the $1,000,000 land investment, the $600,000 financing in the form of a long-term note payable, and the net $400,000 cash outflow. Solutions Manual, Chapter

2 9. Since this cash inflow results from borrowing money, it is reported on the statement of cash flows as a financing activity. 10. Yes; even though a company reports positive net income for the year, it may still show a net cash outflow from operating activities. When net income is reconciled to the net cash flow from operating activities, the net effect of all the adjustment items may be a subtraction from net income (examples of such adjustments are accrued revenues, prepaid expenses, and other gains). If the amount of this net subtraction is larger than the net income, the result is net cash used by operating activities. 11. Depreciation is not a source or a use of cash, even though it must be added to net income when the net cash flow from operating activities is calculated by the indirect method. (Note: When depreciation is deducted on the tax return of a corporation, the effect is to reduce taxable income and reduce the cash outflow for income taxes.) 12. (a) Indirect method. (b) The increase in accounts (trade) receivable represents an amount by which the company had cash tied up in accounts (trade) receivable versus being held in cash. More cash was tied up in accounts (trade) receivable since the prior year. If accounts (trade) receivable had decreased, less cash would have been tied up in accounts (trade) receivable and cash would have increased. 13. Arctic Cat s statement of cash flows shows several major financing activities for the year ended March 31, 2011 ($ thousands): Proceeds from short-term borrowings... $1,012,000 Payments on short-term borrowings... (1,012,000) Proceeds from issuance of common stock ,000 Tax benefit from stock option exercise ,000 Repurchase of common stock... (2,419,000) Net cash provided by (used in) financing activities... $ (946,000) 14. KTM s net cash (all is Euro thousands) from operating activities is 70,348; its net cash used in investing activities is (37,271), and its net cash used in financing activities is (27,060). 15. Piaggio s investing activities yielding cash outflows and inflows for the year ended December 31, 2011, follow. Its cash outflows are listed in parentheses ( in thousands): Investment in property, plant and equipment... (61,790) Sale price, or repayment value, of property, plant and equipment... 6,542 Investment in intangible assets... (64,300) Sale price, or repayment value, of intangible assets Sale price of financial assets... 23,051 Collected interests... 11, Financial & Managerial Accounting, 5th Edition

3 Quick Study 12-1 (20 minutes) QUICK STUDIES 1. The statement of cash flows reports the cash (and cash equivalent) activities of a business for a specific accounting period. The cash flows are classified into operating, investing, and financing activities. The net change in cash as well as the beginning and ending cash balances are also reported on the statement. 2. Examples of transactions classified as investing activities Plant asset purchases Plant asset sales Investment in debt and equity securities (except trading securities) Intangible asset acquisitions and disposals Purchases and sales of natural resources 3. Examples of transactions classified as financing activities Bond retirement and issuance Issuance and settlement of notes payable Common stock issuance Cash paid for dividends Treasury stock acquisitions Owner contributions and withdrawals 4. Examples of significant noncash financing and investing activities Exchange of stock or debt securities for noncash assets Conversion of bonds into stock Purchase of long-term assets by issuing notes payable to seller Settle debt with noncash assets (such as giving equipment to pay off loan) Quick Study 12-2 (10 minutes) 1. Investing 6. Financing 2. Operating 7. Operating 3. Operating 8. Operating 4. Operating 9. Investing* 5. Financing 10. Operating * For the indirect method, the loss is reported as an adjustment (addback) to net income in the operating section. Solutions Manual, Chapter

4 Quick Study 12-3 (10 minutes) Net income... $18,200 Adjustments to reconcile net income to operating cash flow Depreciation... $36,000 Accounts receivable decrease... 7,000 Inventory increase... (5,900) Accounts payable increase... 4,700 Income taxes payable decrease... (150) 41,650 Net cash provided from operating activities... $59,850 Quick Study 12-4 (10 minutes) Computation of cash inflow from sale of furniture Cost of furniture sold (given)... $52,500 Accumulated depreciation at beginning of year (given)... $110,700 Increase from depreciation expense (given)... 18,000 Total expected accumulated depreciation ,700 Actual accumulated depreciation at end of year (given)... (88,700) Accumulated depreciation on sold furniture... 40,000 Cash received from sale of furniture at book value... $12,500 Quick Study 12-5 (10 minutes) Part 1 Computation of cash received from the sale of common stock Increase in Common stock ($105,000 - $100,000)... $ 5,000 Increase in Paid-in capital in excess of par ($567,000-$342,000) ,000 Cash received from the sale of common stock... $230,000 Part 2 Computation of cash paid for dividends Beginning retained earnings... $287,500 Net income... 48,000 Total expected retained earnings ,500 Actual ending retained earnings... (313,500) Cash paid for dividends... $ 22, Financial & Managerial Accounting, 5th Edition

5 Quick Study 12-6 (10 minutes) Net income... $30,000 Adjustments to reconcile net income to operating cash flow Depreciation... $37,600 Accounts receivable decrease... 10,000 Inventory decrease... 10,000 Prepaid expense increase... (1,200) Accounts payable decrease... (6,000) Wages payable increase... 4,000 Income taxes payable decrease... (1,200) 53,200 Net cash provided from operating activities... $83,200 Quick Study 12-7 (15 minutes) Computation of cash inflow from sale of furniture Cost of furniture sold (given)... $55,000 Accumulated depreciation at beginning of year (given)... $ 9,000 Increase from depreciation expense (given)... 37,600 Total expected accumulated depreciation... 46,600 Actual accumulated depreciation at end of year (given)... (17,000) Accumulated depreciation on sold furniture... 29,600 Cash received from sale of furniture at book value... $25,400 Quick Study 12-8 (15 minutes) 1. Computation of cash paid for dividends Beginning retained earnings... $ 8,400 Net income... 30,000 Total expected retained earnings... 38,400 Actual ending retained earnings... (35,600) Decrease from (cash paid for) dividends... $ 2, Computation of cash payments for notes Beginning notes payable... $69,000 Increases to notes (given)... 0 Total expected notes payable... 69,000 Actual ending notes payable... (29,000) Decrease from (cash) payments toward notes... $40,000 Solutions Manual, Chapter

6 Quick Study 12-9 B (10 minutes) 1. Cash received from customers = Sales + Accounts receivable decrease = $488,000 + ($51,000 - $41,000) = $498, Net increase in cash = $94,800 - $24,000 = $70,800 Quick Study B (10 minutes) 1. Cash paid for merchandise = Cost of goods sold - Inventory decrease + Accounts payable decrease = $314,000 - ($95,800 - $85,800) + ($21,000 - $15,000) = $310, Cash paid for operating expenses = Operating expenses (excluding depreciation) + Prepaid expenses increase - Wages payable increase = $89,100 + ($5,400 - $4,200) - ($9,000 - $5,000) = $86,300 Quick Study B (10 minutes) Receipts from sales to customers a... $ 498,000 Payments for merchandise inventory b... (310,000) Payments for other expenses c... (86,300) Payments for taxes d... (18,500) Net cash provided by operating activities... $ 83,200 a From QS 12-9 B b From QS B c From QS B d $17,300 (income tax expense) + $1,200 (decrease in income taxes payable) 672 Financial & Managerial Accounting, 5th Edition

7 Quick Study (10 minutes) 1. Moore is probably in the strongest position of the three competing companies on the basis of the statement of cash flows. Moore s cash flows from operations are able to finance reinvestment in operating assets as well as help in paying down some debt. Sykes is in the second strongest position as it is able to reinvest 57% of its operating cash flows into new productive assets. Kritch is the weakest as it experienced negative cash flows from operations and generates cash by selling productive assets and by taking on new debt. 2. Sykes s cash flow on total assets ratio is slightly stronger than that for Moore. Sykes has a 9.6% ratio ($60,000/$625,000) compared to Moore s 8.9% ratio ($70,000/$790,000). Quick Study A (10 minutes) The balance sheet equation can be arranged so that the algebraic total of all noncash items is equal to cash (see Exhibit 12.8 or similar). It follows that when all changes in noncash balance sheet items are explained, the corresponding change in cash is also explained. On the spreadsheet, when the changes in all noncash balance sheet items have been accounted for, we can be confident that the change in cash also has been fully accounted for. Quick Study (20 minutes) Cash Flows from Operations (Indirect) Case X Case Y Case Z Net Income... $ 4,000 $100,000 $72,000 Adjustments to reconcile net income to net cash provided by operations Depreciation... 30,000 8,000 24,000 Changes in assets and liabilities Accounts receivable... (40,000) (20,000) 4,000 Inventories... 20,000 10,000 (10,000) Accounts payable... 24,000 (22,000) 14,000 Accrued liabilities... (44,000) 12,000 (8,000) Cash provided by (used for) operations... $ (6,000) $ 88,000 $96,000 Quick Study (15 minutes) Investing Activities Purchase of used equipment... $(5,000) Sale of short-term investments... 6,000 Cash provided by investing activities... $ 1,000 Solutions Manual, Chapter

8 Quick Study (15 minutes) Financing Activities Additional short-term borrowings... $20,000 Cash dividends paid... (16,000) Cash provided by financing activities... $ 4,000 Quick Study (25 minutes) Part 1 MONTGOMERY, INC. Statement of Cash Flows (Indirect Method) For Year Ended December 31, 2014 Net income... $ 10,500 Adjustments to reconcile net income to net cash provided by operating activities Decrease in accounts receivable... 2,100 Increase in inventory... (19,950) Decrease in accounts payable... (1,500) Decrease in salaries payable... (100) Depreciation expense... 7,200 Net cash used in operating activities... $ (1,750) Cash flows from investing activities Cash paid for equipment (Note 1)... (8,400) Net cash used in investing activities... (8,400) Cash flows from financing activities Cash received from stock issuance... 10,000 Net cash used in financing activities... 10,000 Net decrease in cash... $ (150) Cash balance at beginning of year... 30,550 Cash balance at end of year... $ 30,400 Note 1 Equipment Bal., 12/31/ ,500 Purchase plug Sale 0 plug = $8,400 Bal., 12/31/ , Financial & Managerial Accounting, 5th Edition

9 Quick Study (Concluded) Part 2 The company s operating cash flows are negative, $(1,750). This is not a good omen. However, much of this is attributed to a huge increase in inventory. Thus, an assessment of the saleable nature of that inventory, and why it is being built up, is crucially important. Also, the level of cash has only marginally declined, from $30,550 to $30,400. Thus, there seems to be sufficient cash. However, one should question why so much of its assets is in the form of cash (more than 19%) as this is not a productive use of assets. Quick Study (15 minutes) 1. Under IFRS (as with U.S. GAAP), both the indirect method and direct method of reporting operating cash flows are acceptable. 2. IFRS and US GAAP differ on the classification of the following cash flows as operating, investing or financing: Cash flow source U.S. GAAP IFRS _ a. Interest paid Operating Financing or Operating b. Dividends paid Financing Financing or Operating c. Interest received Operating Operating or Investing d. Dividends received Operating Operating or Investing Solutions Manual, Chapter

10 EXERCISES Exercise 12-1 (25 minutes) Statement of Cash Flows Operating Activities Investing Activities Financing Activities Noncash Investing & Financing Activities Not Reported on Statement or in Notes a. Declared and paid a cash dividend X b. Recorded depreciation expense X c. Paid cash to settle long-term note payable X d. Prepaid expenses increased in the year X e. Accounts receivable decreased in the year X f. Purchased land by issuing common stock X g. Paid cash to purchase inventory X h. Sold equipment for cash, yielding a loss X X i. Accounts payable decreased in the year X j. Income taxes payable increased in the year X 676 Financial & Managerial Accounting, 5th Edition

11 Exercise 12-2 B (15 minutes) a. Retired long-term notes payable by issuing stock Statement of Cash Flows Operating Activities Investing Activities Financing Activities Noncash Investing & Financing Activities X Not Reported on Statement or in Notes b. Paid cash toward accounts payable X c. Sold inventory for cash X d. Paid cash dividend that was declared in a prior period X e. Accepted six-month note receivable in exchange for plant assets X f. Recorded depreciation expense X g. Paid cash to acquire treasury stock X h. Collected cash from sales X i. Borrowed cash from bank by signing a 9-month note payable X j. Paid cash to purchase a patent X Solutions Manual, Chapter

12 Exercise 12-3 (20 minutes) Net income... $374,000 Adjustments to reconcile net income to net cash provided by operating activities Decrease in accounts receivable... 17,100 Decrease in merchandise inventory... 42,000 Increase in prepaid expenses... (4,700) Decrease in accounts payable... (8,200) Increase in other payables... 1,200 Depreciation expense... 44,000 Amortization expense... 7,200 Gain on sale of plant assets... (6,000) Net cash provided by operating activities... $466,600 Exercise 12-4 (10 minutes) Net income... $400,000 Adjustments to reconcile net income to operating cash flow Depreciation... $80,000 Accounts receivable increase... (40,000) Prepaid expense decrease... 12,000 Accounts payable increase... 6,000 Wages payable decrease... (2,000) Gain on sale of machinery... (20,000) 36,000 Net cash provided from operating activities... $436, Financial & Managerial Accounting, 5th Edition

13 Exercise 12-5 B (15 minutes) Case X: Sales revenue... $515,000 Accounts receivable, Dec. 31, $ 27,200 Accounts receivable, Dec. 31, (33,600) Less increase in accounts receivable... (6,400) Cash received from customers... $508,600 Case Y: Rent expense... $139,800 Rent payable, Dec. 31, $ 7,800 Rent payable, Dec. 31, (6,200) Plus decrease in rent payable... 1,600 Cash paid for rent... $141,400 Case Z: Cost of goods sold... $525,000 Merchandise inventory, Dec. 31, $130,400 Merchandise inventory, Dec. 31, (158,600) Less decrease in merch. inventory... (28,200) Cost of goods purchased ,800 Accounts payable, Dec. 31, ,000 Accounts payable, Dec. 31, (66,700) Less increase in accounts payable... (15,300) Cash paid for merchandise... $481,500 Exercise 12-6 (30 minutes) Net income... $ 481,540 Adjustments to reconcile net income to net cash provided by operating activities Increase in accounts receivable... (30,500) Increase in merchandise inventory... (25,000) Decrease in accounts payable... (12,500) Decrease in salaries payable... (3,500) Depreciation expense... 44,200 Amortization expense Patents... 4,200 Gain on sale of equipment... (6,200) Net cash provided by operating activities... $ 452,240 Solutions Manual, Chapter

14 Exercise 12-7 B (20 minutes) Receipts from customers (see note a)... $1,797,500 Payments for merchandise (see note b)... (1,028,500) Payments for salaries (see note c)... (249,035) Payments for rent... (49,600) Payments for utilities... (18,125) Net cash provided by operating activities... $ 452,240 Note a: Note b: Note c: Sales Increase in receivables $1,828,000 - $30,500 = $1,797,500 Cost of goods sold + Increase in inventory + Decrease in accounts payable $991,000 + $25,000 + $12,500 = $1,028,500 Salaries expense + Decrease in salaries payable $245,535 + $3,500 = $249,035 Exercise 12-8 (10 minutes) Cash flows from investing activities Cash received from the sale of equipment*... $ 51,300 Cash paid for new truck... (89,000) Cash received from the sale of land ,000 Cash received from the sale of long-term investments... 60,800 Net cash provided by investing activities... $221,100 * Cash received from sale of equipment = Book value - loss = $65,300 - $14,000 = $51,300 Exercise 12-9 (10 minutes) Cash flows from financing activities Sale of common stock... $ 64,000 Paid cash dividend... (14,600) Repaid note payable... (50,000) Purchased treasury stock... (12,000) Net cash used by financing activities... $(12,600) 680 Financial & Managerial Accounting, 5th Edition

15 Exercise (40 minutes) Part 1 IKIBAN, INC. Statement of Cash Flows (Indirect Method) For Year Ended June 30, 2013 Net income... $ 99,510 Adjustments to reconcile net income to net cash provided by operating activities Increase in accounts receivable... (14,000) Decrease in merchandise inventory... 22,700 Decrease in prepaid expenses... 1,000 Decrease in accounts payable... (5,000) Decrease in wages payable... (9,000) Decrease in income taxes payables... (400) Depreciation expense... 58,600 Gain on sale of plant assets... (2,000) Net cash provided by operating activities... $151,410 Cash flows from investing activities Cash received from sale of equip. (Note 1)... 10,000 Cash paid for equipment (Note 1 given)... (57,600) Net cash used in investing activities... (47,600) Cash flows from financing activities Cash received from stock issuance... 60,000 Cash paid to retire notes (Note 2 given)... (30,000) Cash paid for dividends (Note 3)... (90,310) Net cash used in financing activities... (60,310) Net increase in cash... $ 43,500 Cash balance at prior year-end... 44,000 Cash balance at current year-end... $ 87,500 (Notes 1, 2, and 3 on next page.) Solutions Manual, Chapter

16 Exercise (Part 1 continued) (1) Cost of equipment sold (Given)... $ 48,600 Accumulated depreciation of equipment sold*... (40,600) Book value of equipment sold... 8,000 Gain on sale of equipment (Given)... 2,000 Cash receipt from sale of equipment... $ 10,000 Cost of equipment sold... $ 48,600 Plus net increase in the equipment account balance... 9,000 Cash paid for new equipment (given)... $ 57,600 Equipment Accumulated Depreciation, Equipment Bal., 6/30/ ,000 Bal., 6/30/2012 9,000 Purchase 57,600 Sale 48,600 Sale (plug) *40,600 Depr. Expense 58,600 Bal., 6/30/ ,000 Bal., 6/30/ ,000 (2) Carrying value of notes retired... $ 30,000 Cash payment to retire notes... $ 30,000 (3) Retained Earnings Bal., 6/30/ ,100 Dividends (plug) 90,310 Net income 99,510 Bal., 6/30/ ,300 Part 2 Cash flow on total assets ratio = Operating cash flows / Average total assets = $151,410 / [($317,700 + $292,900)/2] = $151,410 / $305,300 = 49.6% Interpretation: A 49.6% result on the cash flow on total assets ratio is indicative of very good performance. Also, this favorably compares to its return on assets figure of 32.6% (high-quality earnings). 682 Financial & Managerial Accounting, 5th Edition

17 Exercise B (40 minutes) Part 1 IKIBAN, INC. Statement of Cash Flows (Direct Method) For Year Ended June 30, 2013 Cash received from customers (Note 1)... $664,000 Cash paid for merchandise (Note 2)... (393,300) Cash paid for operating expenses (Note 3)... (75,000) Cash paid for income taxes (Note 4)... (44,290) Net cash provided by operating activities... $151,410 Cash flows from investing activities Cash received from sale of equip. (Note 5)... 10,000 Cash paid for equipment (Note 5 given)... (57,600) Net cash used in investing activities... (47,600) Cash flows from financing activities Cash received from stock issuance... 60,000 Cash paid to retire notes (Note 6)... (30,000) Cash paid for dividends (Note 7)... (90,310) Net cash used in financing activities... (60,310) Net increase in cash... $ 43,500 Cash balance at prior year-end... 44,000 Cash balance at current year-end... $ 87,500 (See notes on next page) Solutions Manual, Chapter

18 Exercise B (continued) Notes (1) Sales... $678,000 Less increase in accounts receivable... (14,000) Cash received from customers... $664,000 (2) Cost of goods sold... $411,000 Less decrease in merchandise inventory... (22,700) Purchases ,300 Plus decrease in accounts payable... 5,000 Cash paid for merchandise... $393,300 (3) Other operating expenses... $ 67,000 Plus decrease in wages payable... 9,000 Less decrease in prepaid expenses... (1,000) Cash paid for other operating expenses... $ 75,000 (4) Income taxes expense... $ 43,890 Plus decrease in income taxes payable Cash paid for income taxes... $ 44,290 (5) Cost of equipment sold (Given)... $ 48,600 Accumulated depreciation of equipment sold*... (40,600) Book value of equipment sold... 8,000 Gain on sale of equipment... 2,000 Cash receipt from sale of equipment... $ 10,000 Cost of equipment sold... $ 48,600 Plus net increase in the equipment account balance... 9,000 Cash paid for new equipment (given)... $ 57,600 Equipment Accumulated Depreciation, Equipment Bal., 6/30/ ,000 Bal., 6/30/2012 9,000 Purchase 57,600 Sale 48,600 Sale *40,600 Depr. Expense 58,600 Bal., 6/30/ ,000 Bal., 6/30/ ,000 (6) Carrying value of notes retired... $ 30,000 Cash payment to retire notes... $ 30,000 (7) Retained Earnings Bal., 6/30/ ,100 Dividends (plug) 90,310 Net income 99,510 Bal., 6/30/ , Financial & Managerial Accounting, 5th Edition

19 Exercise (20 minutes) indirect method Net income... $ 24,000 Depreciation expense... 12,000 Accounts receivable increase...(10,000) Inventory decrease... 16,000 Salaries payable increase... 1,000 Net cash provided by operating activities... $ 43,000 Exercise (30 minutes) 1. indirect method Net income (loss)... $ (16,000) Depreciation expense... 14,600 Accounts receivable decrease... 24,000 Salaries payable increase... 18,000 Accrued liabilities decrease... (8,000) Net cash provided by operating activities... $ 32, One reason for the net loss was depreciation expense. Depreciation expense is added to net income to adjust for the effects of a noncash expense that was deducted in determining net income. It does not involve an inflow of cash. Depreciation expense, along with a decrease in accounts receivable and an increase in salaries payable, turned the net loss into positive operating cash flow. 3. Differences between cash flow from operations and net income can be caused by various items. The most important causes for investors are differences arising from: (1) changes in management of operating activities and (2) changes in revenue and expense recognition. Solutions Manual, Chapter

20 Exercise A (30 minutes) Balance sheet debit bal. accounts SCORETECK CORPORATION Spreadsheet for Statement of Cash Flows For Year Ended December 31, 2013 December 31, 2012 Analysis of Changes Debit Credit December 31, 2013 Cash... $ 80,000 $ 60,000 Accounts receivable ,000 (f) $ 70, ,000 Merchandise inventory ,000 (g) $ 20, ,000 Plant assets ,000 (d) 70, ,000 Balance sheet credit bal. accounts $1,050,000 $1,150,000 Accum. depreciation Plant assets... $ 100,000 (c) 70,000 $ 170,000 Accounts payable ,000 (h) 10, ,000 Notes payable ,000 (e) 20, ,000 Common stock , ,000 Retained earnings ,000 (b) 80,000 (a) 100, ,000 $1,050,000 $1,150,000 Statement of cash flows Operating activities Net income... (a) 100,000 Increase in accounts receivable... (f) 70,000 Decrease in merch. inventory... (g) 20,000 Decrease in accounts payable... (h) 10,000 Depreciation expense... (c) 70,000 Investing activities Payment for plant assets... (d) 70,000 Financing activities Paid cash dividends... (b) 80,000 Issued note payable... (e) 20,000 $440,000 $440, Financial & Managerial Accounting, 5th Edition

21 Exercise B (20 minutes) FERRON COMPANY Statement of Cash Flows For Year Ended December 31, 2013 Receipts from customers... $ 495,000 Receipts of interest... 3,500 Payments for merchandise... (254,500) Payments for salaries... (76,500) Payments for other expenses... (20,000) Net cash provided by operating activities... $147,500 Cash flows from investing activities Receipt from sale of equipment... 60,250 Payment for store equipment... (24,750) Net cash provided by investing activities... 35,500 Cash flows from financing activities Payment to retire long-term notes payable... (100,000) Receipt from borrowing on six-month note... 35,000 Payment of cash dividends... (10,000) Net cash used in financing activities... (75,000) Net increase in cash and cash equivalents... $108,000 Cash and cash equivalents at prior year-end... 40,000 Cash and cash equivalents at current year-end... $148,000 Note No. Noncash investing and financing activities (1) Issued common stock to retire $185,500 of bonds payable. (2) Purchased land financed with a $105,250 long-term note payable. Solutions Manual, Chapter

22 Exercise B (40 minutes) 1. THOMAS CORPORATION Statement of Cash Flows For Year Ended December 31, 2013 Cash received from customers... $5,000,000 Cash received from dividends ,400 Cash paid for merchandise... (2,590,000) Cash paid for wages... (550,000) Cash paid for rent... (320,000) Cash paid for interest... (218,000) Cash paid for taxes... (450,000) Net cash provided by operating activities... $1,080,400 Cash flows from investing activities Cash paid for purchases of machinery... (2,236,000) Cash paid for purchases of long-term investments... (1,260,000) Cash received from sale of land ,000 Cash received from sale of machinery ,000 Net cash used in investing activities... (2,566,000) Cash flows from financing activities Cash received from issuing stock... 1,540,000 Cash received from borrowing... 3,600,000 Cash paid for note payable... (386,000) Cash paid for dividends... (500,000) Cash paid for treasury stock purchases.... (218,000) Net cash provided by financing activities... 4,036,000 Net increase in cash... $2,550,400 Beginning balance of cash ,000 Ending balance of cash... $2,883, a. (i) Financing section reported the largest cash inflow of $4,036,000. (ii) Investing section reported the largest cash outflow of $2,566,000. b. The largest individual item among the investing cash outflows is the purchase of machinery at $2,236,000. c. Proceeds for issuing notes are larger at $3,600,000 than for issuing stock equity at $1,540,000 (see financing section). d. The company has a net cash inflow from borrowing. This is computed from the borrowing proceeds of $3,600,000 less the note payment of $386,000 (see financing section). 688 Financial & Managerial Accounting, 5th Edition

23 Exercise (15 minutes) 2012: $102,920 / $1,240,000 = 8.3% 2013: $138,920 / $1,510,000 = 9.2% Interpretation: Both years ratios are good in that they are positive and at reasonable levels (that is, most businesses can survive with annual returns at ~10%). Further, the ratio improved from 8.3% to 9.2%, which is a good increase. Exercise (20 minutes) PEUGEOT S.A. Statement of Cash Flows (Indirect Method) For Year Ended December 31, 2011 Net income Adjustments to reconcile net income to net cash provided by operating activities Net change (decrease) in working capital... (1,183) Depreciation and amortization... 3,037 Gains on disposals and other... (883) Net cash from operating activities... 1,755 Cash flows from investing activities Cash from disposal of plant assets & intangibles Cash paid for plant assets and intangibles... (3,921) Net cash used in investing activities... (3,732) Cash flows from financing activities Cash from purchases of treasury stock... (199) Cash paid for dividends... (290) Cash paid for other financing activities... (2,282) Net cash from financing activities... (2,771) Net decrease in cash... (4,748) Cash and cash equivalents, Dec 31, ,442 Cash and cash equivalents, Dec 31, ,694 Solutions Manual, Chapter

24 Problem 12-1A (50 minutes) Part 1 PROBLEM SET A FORTEN COMPANY Statement of Cash Flows For Year Ended December 31, 2013 Net income... $114,975 Adjustments to reconcile net income to net cash provided by operating activities: Increase in accounts receivable ($65,810 - $50,625)...(15,185) Increase in inventory ($275,656 - $251,800)...(23,856) Decrease in prepaid expenses ($1,875 - $1,250) Decrease in accounts payable ($114,675 - $53,141)...(61,534) Depreciation expense... 20,750 Loss on disposal of equipment... 5,125 Net cash provided by operating activities... $ 40,900 Cash flows from investing activities Cash received from sale of equipment... 11,625 Cash paid for equipment... (30,000) Net cash used in investing activities... (18,375) Cash flows from financing activities Cash borrowed on short-term note... 4,000 Cash paid on long-term note...(50,125) Cash received from issuing stock (2,500 x $20)... 50,000 Cash paid for dividends...(50,100) Net cash used in financing activities... (46,225) Net decrease in cash... $(23,700) Cash balance at December 31, ,500 Cash balance at December 31, $ 49,800 Noncash investing and financing activities Purchased equipment for $96,375 by signing a $66,375 long-term note payable and paying $30,000 in cash. 690 Financial & Managerial Accounting, 5th Edition

25 Problem 12-1A (Concluded) Part 2 Forten Company's operations provide a positive net cash inflow of $40,900 a good result. At the same time, the cash balance decreased by $23,700 (32%) during the year. Two major cash outflows are the retirement of debt ($50,125) and the dividend payment ($50,100), which together represent 87% of net income. Also, the $30,000 cash investment in equipment is presumably necessary to replace the older equipment sold. Helping fund these cash outflows is $50,000 cash from issuance of stock. Moreover, the company took on additional debt (more than 30% increase in indebtedness); namely, $66,375 in long-term notes. The company must recognize that that the debt must eventually be repaid with interest. In summary, perhaps the company should review the wisdom of paying cash dividends that are considerably larger than cash provided from operations, especially when the payment also results in a deteriorating cash position and when the company is taking on additional debt. Solutions Manual, Chapter

26 Problem 12-2A A (60 minutes) FORTEN COMPANY Spreadsheet for Statement of Cash Flows For Year Ended December 31, 2013 December Analysis of Changes 31, 2012 Debit December 31, 2013 Credit Balance sheet debits Cash... $ 73,500 $ 49,800 Accounts receivable... 50,625 (b) $15,185 65,810 Merchandise inventory ,800 (c) 23, ,656 Prepaid expenses... 1,875 (d) $ 625 1,250 Equipment ,000 (h) 96,375 (g) 46, ,500 $485,800 $550,016 Balance sheet--credits Accum. depreciation Equip.... $ 46,000 (g) 30,125 (f) 20,750 $ 36,625 Accounts payable ,675 (e) 61,534 53,141 Short-term notes payable... 6,000 (j) 4,000 10,000 Long-term notes payable... 48,750 (k) 50,125 (i) 66,375 65,000 Common stock, $5 par value ,250 (l) 12, ,750 Paid-in capital in excess of par value, common stock... 0 (l) 37,500 37,500 Retained earnings ,125 (m) 50,100 (a) 114, ,000 $485,800 $550,016 Statement of cash flows Operating activities Net income... (a) 114,975 Increase in accts. receivable... (b) 15,185 Increase in merch. inventory... (c) 23,856 Decrease in prepaid expenses... (d) 625 Decrease in accounts payable... (e) 61,534 Depreciation expense... (f) 20,750 Loss on sale of equipment... (g) 5,125 Investing activities Receipt from sale of equipment... (g) 11,625 Payment to purchase equipment... (h) 30,000 Financing activities Borrowed on short-term note... (j) 4,000 Payment on long-term note... (k) 50,125 Issued common stock for cash... (l) 50,000 Payments of cash dividends... (m) 50,100 Noncash investing and financing activities Purchase of equip. financed by long-term note payable... (i) 66,375 (h) 66,375 $600,775 $600, Financial & Managerial Accounting, 5th Edition

27 Problem 12-2A A (Concluded) FORTEN COMPANY Statement of Cash Flows For Year Ended December 31, 2013 Net income... $114,975 Adjustments to reconcile net income to net cash provided by operating activities: Increase in accounts receivable ($65,810 - $50,625)...(15,185) Increase in inventory ($275,656 - $251,800)...(23,856) Decrease in prepaid expenses ($1,875 - $1,250 ) Decrease in accounts payable ($114,675 - $53,141)...(61,534) Depreciation expense... 20,750 Loss on disposal of equipment... 5,125 Net cash provided by operating activities... $ 40,900 Cash flows from investing activities Cash received from sale of equipment... 11,625 Cash paid for equipment... (30,000) Net cash used in investing activities... (18,375) Cash flows from financing activities Cash borrowed on short-term note... 4,000 Cash paid on long-term note...(50,125) Cash received from issuing stock (2,500 x $20)... 50,000 Cash paid for dividends...(50,100) Net cash used in financing activities... (46,225) Net decrease in cash... $(23,700) Cash balance at beginning of ,500 Cash balance at end of $ 49,800 Noncash investing and financing activities Purchased equipment for $96,375 by signing a $66,375 long-term note payable and paying $30,000 in cash. Solutions Manual, Chapter

28 Problem 12-3A B (40 minutes) FORTEN COMPANY Statement of Cash Flows For Year Ended December 31, 2013 Cash received from customers (Note 1)... $567,315 Cash paid for merchandise (Note 2)... (370,390) Cash paid for other expenses (Note 3)... (131,775) Cash paid for income taxes... (24,250) Net cash provided by operating activities... $ 40,900 Cash flows from investing activities Cash received from sale of equipment... 11,625 Cash paid for equipment... (30,000) Net cash used in investing activities... (18,375) Cash flows from financing activities Cash borrowed on short-term note... 4,000 Cash paid on long-term note... (50,125) Cash received from issuing stock (2,500 x $20)... 50,000 Cash paid for dividends... (50,100) Net cash used in financing activities... (46,225) Net decrease in cash... $(23,700) Cash balance at December 31, ,500 Cash balance at December 31, $ 49,800 Noncash investing and financing activities Purchased equipment for $96,375 by signing a $66,375 long-term note payable and paying $30,000 in cash. Supporting calculations (1) Sales - Increase in receivables = $582,500 - ($65,810 - $50,625) = $567,315 (2) Cost of Increase in Decrease in + goods sold inventory + payables = $285,000 + ($275,656 - $251,800) + ($114,675 - $53,141) = $370,390 (3) Other expenses - Decrease in prepaid expenses = $132,400 - ($1,875 - $1,250) = $131, Financial & Managerial Accounting, 5th Edition

29 Problem 12-4A (35 minutes) GOLDEN CORPORATION Statement of Cash Flows For Year Ended December 31, 2013 Net income... $136,000 Adjustments to reconcile net income to net cash provided by operating activities Increase in accounts receivable ($83,000 - $71,000)... (12,000) Increase in inventory ($601,000 - $526,000)... (75,000) Increase in accounts payable ($87,000 - $71,000)... 16,000 Increase in taxes payable ($28,000 - $25,000)... 3,000 Depreciation expense... 54,000 Net cash provided by operating activities... $122,000 Cash flows from investing activities Cash paid for equipment... (36,000) Cash flows from financing activities Cash received from issuing stock (12,000 x $5)... 60,000 Cash paid for cash dividends... (89,000) Net cash used in financing activities... (29,000) Net increase in cash... $ 57,000 Cash balance at December 31, ,000 Cash balance at December 31, $164,000 Solutions Manual, Chapter

30 Problem 12-5A A (50 minutes) GOLDEN CORPORATION Spreadsheet for Statement of Cash Flows For Year Ended December 31, 2013 December 31, 2012 Analysis of Changes Debit Credit December 31, 2013 Balance sheet--debits Cash... $ 107,000 $ 164,000 Accounts receivable... 71,000 (b) $ 12,000 83,000 Merchandise inventory ,000 (c) 75, ,000 Equipment ,000 (g) 36, ,000 $1,003,000 $1,183,000 Balance sheet--credits Accum. depreciation Equip.... $ 104,000 (f) $ 54,000 $ 158,000 Accounts payable... 71,000 (d) 16,000 87,000 Income taxes payable... 25,000 (e) 3,000 28,000 Common stock, $2 par value ,000 (h) 24, ,000 Paid-in capital in excess of par value, common stock ,000 (h) 36, ,000 Retained earnings... 75,000 (i) 89,000 (a) 136, ,000 $1,003,000 $1,183,000 Statement of cash flows Operating activities Net income... (a) 136,000 Increase in accounts receivable... (b) 12,000 Increase in merch. inventory... (c) 75,000 Increase in accounts payable... (d) 16,000 Increase in income tax payable... (e) 3,000 Depreciation expense... (f) 54,000 Investing activities Payment for equipment... (g) 36,000 Financing activities Issued common stock for cash... (h) 60,000 Paid cash dividends... (i) 89,000 $481,000 $481, Financial & Managerial Accounting, 5th Edition

31 Problem 12-5A A (Concluded) GOLDEN CORPORATION Statement of Cash Flows For Year Ended December 31, 2013 Net income... $136,000 Adjustments to reconcile net income to net cash provided by operating activities Increase in accounts receivable ($83,000 - $71,000)... (12,000) Increase in inventory ($601,000 - $526,000)... (75,000) Increase in accounts payable ($87,000 - $71,000)... 16,000 Increase in taxes payable ($28,000 - $25,000)... 3,000 Depreciation expense... 54,000 Net cash provided by operating activities... $122,000 Cash flows from investing activities Cash paid for equipment... (36,000) Cash flows from financing activities Cash received from issuing stock (12,000 x $5)... 60,000 Cash paid for cash dividends... (89,000) Net cash used in financing activities... (29,000) Net increase in cash... $ 57,000 Cash balance at beginning of ,000 Cash balance at end of $164,000 Solutions Manual, Chapter

32 Problem 12-6A B (35 minutes) GOLDEN CORPORATION Statement of Cash Flows For Year Ended December 31, 2013 Cash received from customers (Note 1)... $1,780,000 Cash paid for merchandise (Note 2)... (1,145,000) Cash paid for other operating expenses... (494,000) Cash paid for income taxes (Note 3)... (19,000) Net cash provided by operating activities... $122,000 Cash flows from investing activities Cash paid for equipment... (36,000) Cash flows from financing activities Cash from issuing stock (12,000 x $5)... 60,000 Cash paid for cash dividends... (89,000) Net cash used in financing activities... (29,000) Net increase in cash... $ 57,000 Cash balance at December 31, ,000 Cash balance at December 31, $164,000 Supporting calculations (1) Sales - Increase in receivables = $1,792,000 - ($83,000 - $71,000) = $1,780,000 (2) Cost of Increase in Increase in goods sold + - inventory accounts payable = $1,086,000 + ($601,000 - $526,000) - ($87,000 - $71,000) = $1,145,000 (3) Income taxes expense - Increase in income taxes payable = $22,000 - ($28,000 - $25,000) = $19, Financial & Managerial Accounting, 5th Edition

33 Problem 12-7A (35 minutes) LANSING COMPANY Cash Flows from Operating Activities Indirect Method For Year Ended December 31, 2013 Net income... $ 6,000 Adjustments to reconcile net income to net cash provided by operating activities Depreciation expense... $12,000 Decrease in accounts receivable Increase in merchandise inventory... (440 ) Decrease in accounts payable... (200 ) Increase in salaries payable Increase in utilities payable Increase in prepaid rent... (40 ) Decrease in prepaid insurance ,780 Net cash provided by operating activities... $17,780 Solutions Manual, Chapter

34 Problem 12-8A B (35 minutes) LANSING COMPANY Cash Flows from Operating Activities Direct Method For Year Ended December 31, 2013 Cash receipts from customers (1)... $ 97,400 Cash payments to suppliers (2)... (42,640) ) Cash payments for salaries (3)... (17,820) ) Cash payments for rent (4)... (9,040) ) Cash payments for insurance (5)... (3,780) ) Cash payments for utilities (6)... (2,740) ) Cash payments for interest... (3,600) ) Net cash provided by operating activities... $ 17,780 Supporting calculations (1) Sales + Decrease in receivables = $97,200 + ($5,800 - $5,600) = $97,400 (2) Cost of + Increase in + Decrease in goods sold inventory accts payable = $42,000 + ($1,980 - $1,540) + ($4,600 - $4,400) = $42,640 (3) Salaries expense - Increase in salaries payable = $18,000 - ($880 - $700) = $17,820 (4) Rent expense + Increase in prepaid rent = $9,000 + ($220 - $180) = $9,040 (5) Insurance expense - Decrease in prepaid insurance = $3,800 - ($280 - $260) = $3,780 (6) Utilities expense - Increase in utilities payable = $2,800 - ($220 - $160) = $2, Financial & Managerial Accounting, 5th Edition

35 Problem 12-1B (40 minutes) Part 1 PROBLEM SET B GAZELLE CORPORATION Statement of Cash Flows For Year Ended December 31, 2013 Net income... $158,100 Adjustments to reconcile net income to net cash provided by operating activities Decrease in accounts receivable ($80,750 - $77,100)... 3,650 Decrease in inventory ($250,700 - $240,600)... 10,100 Decrease in prepaid expenses ($17,000 - $15,100)... 1,900 Decrease in accounts payable ($102,000 - $17,750)... (84,250) Depreciation expense... 38,600 Loss on disposal of equipment... 2,100 Net cash provided by operating activities... $130,200 Cash flows from investing activities Cash received from sale of equipment... 26,050 Cash paid for equipment... (43,250) Net cash used in investing activities... (17,200) Cash flows from financing activities Cash borrowed on short-term note... 5,000 Cash paid on long-term note... (47,500) Cash received from issuing stock (3,000 x $15)... 45,000 Cash paid for dividends... (53,600) Net cash used in financing activities... (51,100) ) Net increase in cash... $ 61,900 Cash balance at December 31, ,550 Cash balance at December 31, $123,450 Noncash investing and financing activities Purchased equipment for $113,250 by signing a $70,000 long-term note payable and paying $43,250 in cash. Solutions Manual, Chapter

36 Problem 12-1B (Continued) Part 2 Gazelle Corporation's dividend payments of $53,600 represent 34% of the $158,100 net income for the year, and 41% of cash inflow provided by operations of $130,200. Further analysis reveals that investing activities used a modest $17,200 and, including the dividends, financing activities used $51,100. This resulted in a $61,900 increase in the company's cash balance for the year, a 101% increase. Companies usually pay dividends that are substantially less than net income. The analysis of cash flows for this company indicates no reason to question the amount of the current dividend. Indeed, the liquidity position of the company did not deteriorate as a result of its cash dividend. 702 Financial & Managerial Accounting, 5th Edition

37 Problem 12-2B A (60 minutes) GAZELLE CORPORATION Spreadsheet for Statement of Cash Flows For Year Ended December 31, 2013 December Analysis of Changes December 31, 2012 Debit Credit 31, 2013 Balance sheet--debits Cash... $ 61,550 $123,450 Accounts receivable... 80,750 (b) $ 3,650 77,100 Merchandise inventory ,700 (c) 10, ,600 Prepaid expenses... 17,000 (d) 1,900 15,100 Equipment ,000 (h) $113,250 (g) 51, ,250 $610,000 $718,500 Balance sheet--credits Accum. depreciation Equip.... $ 95,000 (g) 22,850 (f) 38,600 $110,750 Accounts payable ,000 (e) 84,250 17,750 Short-term notes payable... 10,000 (j) 5,000 15,000 Long-term notes payable... 77,500 (k) 47,500 (i) 70, ,000 Common stock, $5 par value ,000 (l) 15, ,000 Paid-in capital in excess of par value, common stock... 0 (l) 30,000 30,000 Retained earnings ,500 (m) 53,600 (a) 158, ,000 $610,000 $718,500 Statement of cash flows Operating activities Net income... (a) 158,100 Decrease in accounts receivable... (b) 3,650 Decrease in merch. inventory... (c) 10,100 Decrease in prepaid expenses... (d) 1,900 Decrease in accounts payable... (e) 84,250 Depreciation expense... (f) 38,600 Loss on sale of equipment... (g) 2,100 Investing activities Receipt from sale of equipment... (g) 26,050 Payment to purchase equipment... (h) 43,250 Financing activities Borrowed on short-term note... (j) 5,000 Payment on long-term note... (k) 47,500 Issued common stock for cash... (l) 45,000 Payments of cash dividends... (m) 53,600 Noncash investing and financing activities Purchase of equip. financed by long-term note payable... (i) 70,000 (h) 70,000 $681,950 $681,950 Solutions Manual, Chapter

38 Problem 12-2B A (Concluded) GAZELLE CORPORATION Statement of Cash Flows For Year Ended December 31, 2013 Net income... $158,100 Adjustments to reconcile net income to net cash provided by operating activities Decrease in accounts receivable ($80,750 - $77,100)... 3,650 Decrease in inventory ($250,700 - $240,600)... 10,100 Decrease in prepaid expenses ($17,000 - $15,100)... 1,900 Decrease in accounts payable ($102,000 - $17,750)... (84,250) Depreciation expense... 38,600 Loss on disposal of equipment... 2,100 Net cash provided by operating activities... $130,200 Cash flows from investing activities Cash received from sale of equipment... 26,050 Cash paid for equipment... (43,250) Net cash used in investing activities... (17,200) Cash flows from financing activities Cash borrowed on short-term note... 5,000 Cash paid on long-term note... (47,500) Cash received from issuing stock (3,000 x $15)... 45,000 Cash paid for dividends... (53,600) Net cash used in financing activities... (51,100) Net increase in cash... $ 61,900 ) Cash balance at beginning of year ,550 Cash balance at end of year $123,450 Noncash investing and financing activities Purchased equipment for $113,250 by signing a $70,000 long-term note payable and paying $43,250 in cash. 704 Financial & Managerial Accounting, 5th Edition

39 Problem 12-3B B (40 minutes) GAZELLE CORPORATION Statement of Cash Flows For Year Ended December 31, 2013 Cash received from customers (Note 1)... $1,188,650 Cash paid for merchandise (Note 2)... (669,150) Cash paid for other expenses (Note 3)... (360,950) Cash paid for income taxes... (28,350) Net cash provided by operating activities... $130,200 Cash flows from investing activities Cash received from sale of equipment... 26,050 Cash paid for equipment... (43,250) Net cash used in investing activities... (17,200) Cash flows from financing activities Cash borrowed on short-term note... 5,000 Cash paid on long-term note... (47,500) Cash received from issuing stock (3,000 x $15)... 45,000 Cash paid for dividends... (53,600) Net cash used in financing activities... (51,100) Net increase in cash... $ 61,900 Cash balance at December 31, ,550 Cash balance at December 31, $123,450 Noncash investing and financing activities Purchased equipment for $113,250 by signing a $70,000 long-term note payable and paying $43,250 in cash. Supporting calculations (1) Sales + Decrease in receivables = $1,185,000 + ($80,750 - $77,100) = $1,188,650 (2) Cost of Decrease in Decrease in - goods sold inventory + payables = $595,000 - ($250,700 $240,600) + ($102,000 - $17,750) = $669,150 (3) Other expenses - Decrease in prepaid expenses = $362,850 - ($17,000 - $15,100) = $360,950 Solutions Manual, Chapter

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