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The Foundational 15
1.
The net decrease in cash and cash equivalents would equal the $9,000
decrease in the cash balance (from $57,000 to $48,000) as shown on
the balance sheet.
2.
3.
Ending balance
$57,000
$57,000
$2,000
=
=
=
=
Ending balance
$50,000
$50,000
$19,000
Accounts Receivable
44,000
600,000 Cash collections
41,000
603,000
6.
Supplier payments
Inventory
50,000
405,000 Goods sold
55,000
Accounts Payable
Beg. Bal.
430,000 Purchases
End. Bal.
400,000
57,000
405,000
32,000
8.
Tax payments
28,000
25,000
25,000
$28,000. This amount represents the cash paid for income taxes.
The Foundational 15 (continued)
9.
10. The operating activities section of the statement of cash flows would
contain an adjustment related to a gain on the sale of a piece of
equipment. The equipment was sold for $3,000 and it had a book
value at the time of its sale of $2,000 (= $6,000 original cost $4,000
of accumulated depreciation); therefore, the company would record a
$1,000 gain on the sale. This amount would be subtracted from net
income in the operating activities section of the statement.
11. The net cash provided by operating activities would be computed as
follows:
Net income ............................................................
$ 2,000
Adjustments to convert net income to a cash
basis:
Depreciation ........................................................
$19,000
Decrease in accounts receivable ............................
3,000
Increase in inventory ............................................
(5,000)
Decrease in accounts payable ................................
(25,000)
Decrease in income taxes payable..........................
(3,000)
Gain on sale of equipment ................................ (1,000) (12,000)
Net cash used in operating activities .........................
$(10,000)
12. The gross cash outflows of $16,000 can be computed by applying the
basic equation for assets to the Property, Plant, and Equipment
account as follows:
Beginning balance + Debits Credits= Ending balance
$140,000 + Debits $6,000 = $150,000
Debits = $150,000 $140,000 + $6,000
Debits = $16,000
a.
b.
c.
d.
e.
f.
g.
h.
i.
j.
k.
l.
m.
Transaction
Paid bills to insurers and utility providers .............
Purchased equipment with cash..........................
Paid wages and salaries to employees .................
Paid taxes to the government .............................
Loaned money to another entity .........................
Sold common stock ...........................................
Paid a cash dividend to stockholders ...................
Paid interest to lenders ......................................
Repaid the principal amount of a debt .................
Paid suppliers for inventory purchases .................
Borrowed money from a creditor ........................
Paid cash to repurchase its own stock .................
Collected cash from customers ...........................
Activity
Operating Investing
X
X
X
X
X
X
X
X
X
X
X
X
X
Financing
Decrease
in Account
Balance
+ 25,000
77,000
+ 2,000
20,000
4,000
+ 6,000
Net income............................................................
Adjustments to convert net income to a cash basis:
Depreciation .......................................................
Decrease in accounts receivable ............................
Increase in inventory ...........................................
Decrease in prepaid expenses ...............................
Decrease in accounts payable ...............................
Decrease in accrued liabilities ...............................
Increase in income taxes payable ..........................
Net cash provided by operating activities ..................
$84,000
$50,000
25,000
(77,000)
2,000
(20,000)
(4,000)
6,000 (18,000)
$66,000
$ 36,000
$120,000
20,000
140,000
$(104,000)
+6
+ 20
Because Holly did not sell any plant and equipment and it did not
repurchase any of its own stock, the amounts above represent gross
cash flows.
The following equation can be applied to the Retained Earnings account
to compute the dividend payment (the debit to the account):
Beginning balance Debits + Credits
$138 Debits + $20
$158
Debits
=
=
=
=
Ending balance
$150
$150 + Debits
$8
$20
$10
(7)
(14)
6
Investing activities:
Increase in plant and equipment .............................
Net cash used in investing activities .........................
(30)
Financing activities:
Increase in common stock ......................................
Cash dividends ......................................................
Net cash provided by financing activities ..................
20
(8)
(5)
15
(30)
12
(3)
7
$ 4
$ 15
$30
8
38
$(23)
11
+ 20
10
+ 15
Step 3: The loss on sale of investments ($5) is added to net income and
the gain on the sale of land ($40) is subtracted from net income.
$75
$40
10
(30)
5
20
(10)
15
5
(40)
15
$90
20
+ 40
13
50
30
The statement of cash flows must report the gross cash outflow of $20
and the gross cash inflow related to the sale of the investment of $45.
Retained Earnings
Dividends
35 Net income
Change
75
40
The statement of cash flows must report the dividend payment of $35.
$ 90
Investing activities:
Proceeds from sale of long-term investments ................ $ 45
Proceeds from sale of land ..........................................
70
Additions to long-term investments ..............................
(20)
Additions to property, plant & equipment ...................... (150)
Net cash used in investing activities..............................
(55)
Financing activities:
Retirement of bonds payable .......................................
Issuance of common stock ..........................................
Cash dividends ...........................................................
Net cash used in financing activities .............................
(15)
(20)
40
(35)
20
100
$120
15
Amount
$70,000 decrease
$110,000 increase
$3,000 decrease
$40,000 decrease
$9,000 increase
$15,000 increase
$8,000 gain
$12,000 loss
Add
X
Subtract
X
X
X
X
X
X
X
17
19
=
=
=
=
Ending balance
$85
$85 $70 + $10
$25
Step 2: The guidelines from Exhibit 12-2 can be used to analyze the
changes in noncash balance sheet accounts that impact net income as
follows:
Increase in
Account
Balance
Current Assets
Accounts receivable .......
Inventory......................
Prepaid expenses ..........
Current Liabilities
Accounts payable ..........
Accrued liabilities ...........
Income taxes payable ....
Decrease in
Account
Balance
80
+ 35
2
+ 75
10
+8
$ 56
$25
(80)
35
(2)
75
(10)
8
(5)
2
48
$104
+ 25
40
21
=
=
=
=
Ending balance
$500
$500 $420 + $30
$110
=
=
=
=
Ending balance
$132
$132 + Debits
$16
$ 56
$ 25
(80)
35
(2)
75
(10)
8
(5)
2
Investing activities:
Proceeds from sale of long-term investments ........
Proceeds from sale of equipment.........................
Additions to plant and equipment ........................
Net cash used in investing activities .....................
12
18
(110)
Financing activities:
Issuance of bonds payable ..................................
Decrease in common stock .................................
Cash dividends ..................................................
Net cash used in financing activities ....................
25
(40)
(16)
48
104
(80)
(31)
(7)
11
$ 4
23
=
=
=
=
Ending balance
$165,000
$165,000 $130,000 + $10,000
$45,000
Step 2: The guidelines from Exhibit 12-2 can be used to analyze the
changes in noncash balance sheet accounts that impact net income as
follows:
Increase
in Account
Balance
Current Assets
Accounts receivable ............
Inventory ..........................
Prepaid expenses ...............
Current Liabilities
Accounts payable ...............
Accrued liabilities ................
Income taxes payable .........
Decrease
in Account
Balance
70,000
48,000
+ 9,000
+ 50,000
8,000
+ 4,000
$63,000
$ 45,000
(70,000)
(48,000)
9,000
50,000
(8,000)
4,000
(6,000) (24,000)
$39,000
+ 90,000
+ 60,000
25
=
=
=
=
Ending balance
$120,000
$120,000 + Debits
$33,000
26,000
(40,000)
(150,000)
Financing activities:
Issuance of bonds payable ...............................
Issuance of common stock ...............................
Cash dividends ................................................
Net cash provided by financing activities ............
90,000
60,000
(33,000)
(164,000)
117,000
(8,000)
19,000
$ 11,000
27
a.
b.
c.
d.
e.
f.
g.
h.
i.
j.
k.
l.
Transaction
Operating Investing
Bonds were retired by paying the
principal amount due ..........................
Interest was paid to a lender ..................
X
Income taxes were paid .........................
X
A long-term loan was made to a supplier .
X
Cash dividends were declared and paid ...
Common stock was sold for cash ............
Equipment was sold for cash ..................
X
Paid wages to employees .......................
X
Collected cash from customers ...............
X
Paid cash to repurchase its own stock .....
Bought equipment for cash ....................
X
Paid suppliers for inventory purchases .....
X
Financing
X
X
X
Cash
Outflow
X
X
X
X
X
X
X
X
X
Cash
Inflow
29
X
X
X
=
=
=
=
Ending balance
$770
$770 $651 + $7
$126
Step 2: The guidelines from Exhibit 12-2 can be used to analyze the
changes in noncash balance sheet accounts that impact net income as
follows:
Increase in
Decrease in
Account Balance
Account Balance
Current Assets
Accounts receivable ..........
52
Inventory.........................
40
Current Liabilities
Accounts payable .............
Accrued liabilities ..............
Income taxes payable .......
+ 100
+ 10
+5
$170
$126
(52)
(40)
100
10
5
(2)
147
$317
21
185
31
=
=
=
=
Ending balance
$1,505
$1,505 $1,484 + $12
$33
=
=
=
=
Ending balance
$987
$987 + Debits
$148
$ 170
$126
(52)
(40)
100
10
5
(2)
Investing activities:
Proceeds from sale of equipment ......................
Additions to plant and equipment ......................
Net cash used in investing activities...................
7
(33)
Financing activities:
Retirement of bonds payable ............................
Cash dividends ................................................
Net cash used in financing activities ..................
(185)
(148)
147
317
(26)
(333)
(42)
81
$ 39
2. Blankleys net income decreased by $20 million; however, its net cash
provided by operating activities increased by $157 million over the prior
year. When net income and net cash provided by operating activities
move in opposite directions it warrants further inquiry. It appears that
Blankley has inflated its net cash provided by operating activities by
delaying payments to suppliers (see $100 million adjustment related to
Accounts Payable). The companys accounts receivable balance has
increased substantially (+52 million) even though sales have declined.
The McGraw-Hill Companies, Inc., 2013. All rights reserved.
Solutions Manual, Chapter 12
33
85,000
75,000
The change in the retained earnings balance is $75,000 and the cash
dividends are $10,000; therefore, the net income must be $85,000.
Step 1: The following equation can be applied to the Accumulated
Depreciation account to compute the depreciation to add back to net
income:
Beginning balance Debits + Credits = Ending balance
$975,000 $145,000 + Credits = $1,040,000
Credits = $1,040,000 $975,000 + $145,000
Credits = $210,000
Step 2: The guidelines from Exhibit 12-2 can be used to analyze the
changes in noncash balance sheet accounts that impact net income as
follows:
Increase in
Account Balance
Current Assets
Accounts receivable ....
Inventory ..................
Prepaid expenses .......
Current Liabilities
Accounts payable .......
Accrued liabilities ........
Income taxes payable .
Decrease in
Account Balance
170,000
+ 63,000
4,000
+ 48,000
5,000
+ 9,000
35
Decrease in
Account
Balance
340,000
90,000
+ 80,000
+ 200,000
+ 120,000
37
$ 85,000
$210,000
(170,000)
63,000
(4,000)
48,000
(5,000)
9,000
(20,000) 131,000
216,000
Investing activities:
Decrease in long-term loan to subsidiary ..............
Proceeds from sale of equipment .........................
Additions to long-term investments ......................
Additions to plant and equipment ........................
Net cash used in investing activities .....................
80,000
35,000
(90,000)
(500,000)
Financing activities:
Issuance of bonds payable ..................................
Issuance of common stock ..................................
Cash dividends ..................................................
Net cash provided by financing activities ..............
200,000
120,000
(10,000)
(475,000)
310,000
51,000
109,000
$160,000
+ 300,000
17,000
+ 15,000
39
Decrease in
Account
Balance
570,000
+ 50,000
50,000
+ 220,000
+ 90,000
=
=
=
=
Ending balance
$496,000
$496,000 + Debits
$69,000
41
$170,000
$ 95,000
20,000
(188,000)
(5,000)
300,000
(17,000)
15,000
20,000
(60,000) 180,000
350,000
Investing activities:
Proceeds from sale of long-term investments...... 110,000
Proceeds from sale of equipment ......................
70,000
Loans to subsidiaries ........................................ (50,000)
Additions to plant and equipment ...................... (700,000)
Net cash used in investing activities ...................
(570,000)
Financing activities:
Issuance of bonds payable................................ 600,000
Issuance of common stock................................
90,000
Retirement of bonds payable............................. (380,000)
Cash dividends to stockholders.......................... (69,000)
Net cash provided by financing activities ............
241,000
Net increase in cash and cash equivalents ..........
Cash balance, beginning ...................................
Cash balance, ending .......................................
21,000
50,000
$ 71,000
43
55,000
7,000
+ 3,000
+ 100,000
5,000
45
=
=
=
=
Ending balance
$192,000
$192,000 + Debits
$28,000
50,000
44,000
(200,000)
Financing activities:
Issuance of bonds payable ..............................
Decrease in common stock ..............................
Cash dividends ...............................................
Net cash provided by financing activities ...........
100,000
(5,000)
(28,000)
(106,000)
67,000
(18,000)
33,000
$ 15,000
47
Communicating in Practice
Date:
To:
From:
Subject:
Current Date
Instructors Name
Students Name
Preparing and Interpreting the Statement of Cash Flows
49
Appendix 12A
The Direct Method of Determining the Net Cash
Provided by Operating Activities
Exercise 12A-1 (15 minutes)
Sales ............................................................
Adjustments to a cash basis:
Plus decrease in accounts receivable ...........
$1,000,000
580,000
+ 25,000 $1,025,000
+ 77,000
+ 20,000
677,000
300,000
2,000
+ 4,000
50,000
252,000
36,000
6,000
30,000
$
66,000
Note that the $66,000 agrees with the net cash provided by operating
activities figure under the indirect method in the previous exercise.
$500
300
7 $493
+14
6
308
180
10
170
$ 15
51
$600
250
+10 $610
+30
20
260
280
5
+10
40
245
30
15
15
$ 90
$2,000
1,200
500
120
+30
20
20
+4
+5
80
20
$2,030
1,160
429
100
$ 341
2. Gains and losses on the sale of assets would have no effect on the
computations in (1). The reason is that these items are not part of
sales, cost of goods sold, selling and administrative expenses, or income
taxes. Thus, gains and losses on the income statement are ignored
under the direct method.
53
$750
450
223
80 $670
35
75
+2
+10
25
340
210
24
8
16
$104
Eaton Company
Statement of Cash Flows
For the Year ended December 31, 2011
Operating activities:
Cash received from customers ......................
Less cash disbursements for:
Cost of merchandise sold ...........................
Selling and administrative expenses ............
Income taxes ............................................
Total cash disbursements..............................
Net cash provided by operating activities........
$670
$340
210
16
566
104
Investing activities:
Proceeds from sale of long-term investments..
Proceeds from sale of equipment ..................
Additions to plant and equipment ..................
Net cash used in investing activities ...............
12
18
(110)
Financing activities:
Issuance of bonds payable............................
Decrease in common stock ...........................
Cash dividends ............................................
Net cash used in financing activities ..............
25
(40)
(16)
(80)
(31)
(7)
11
$ 4
55
$700,000
400,000
70,000 $630,000
+48,000
50,000
216,000
27,000
9,000
+8,000
45,000
4,000
398,000
170,000
23,000
$ 39,000
Foxboro Company
Statement of Cash Flows
For Year 2
Operating activities:
Cash received from customers ................
Less cash disbursements for:
Cost of merchandise purchased ............
Selling and administrative expenses ......
Income taxes ......................................
Total cash disbursements........................
Net cash provided by operating activities..
$630,000
$398,000
170,000
23,000
591,000
39,000
Investing activities:
Proceeds from sale of equipment ............
Loan to Harker Company ........................
Additions to plant and equipment ............
Net cash used in investing activities .........
26,000
(40,000)
(150,000)
Financing activities:
Issuance of bonds payable......................
Issuance of common stock......................
Cash dividends ......................................
Net cash provided by financing activities ..
90,000
60,000
(33,000)
(164,000)
117,000
(8,000)
19,000
$ 11,000
57
$800,000
500,000
+10,000 $810,000
+54,000
+55,000
609,000
214,000
8,000
+7,000
60,000
153,000
30,000
3,000
27,000
$ 21,000
59
Allied Company
Statement of Cash Flows
For the Year Ended December 31, 2011
Operating activities:
Cash received from customers ......................
Less cash disbursements for:
Cost of merchandise purchased ..................
Selling and administrative expenses ............
Income taxes ............................................
Total cash disbursements..............................
Net cash provided by operating activities........
$810,000
$609,000
153,000
27,000
789,000
21,000
Investing activities:
Proceeds from sale of long-term investments..
Proceeds from sale of equipment ..................
Additions to plant and equipment ..................
Net cash used in investing activities ...............
50,000
44,000
(200,000)
Financing activities:
Issuance of bonds payable............................
Decrease in common stock ...........................
Cash dividends ............................................
Net cash provided by financing activities ........
100,000
(5,000)
(28,000)
(106,000)
67,000
(18,000)
33,000
$ 15,000