PROBLEM 13-7B Classifying Transactions on a Statement of Cash Flows (LO1, LO2)

Below are a number of transactions that took place in Willie Corporation during the past year:

a. Common stock was sold for cash.

b. Equipment was sold for cash.
c. A long-term loan was made to a subsidiary.
d. Interest was received on the loan in (c) above, reducing Interest Receivable.
e. Interest was paid on a note, decreasing Interest Payable.
f. A stock dividend was declared and issued on common stock.
g. A building was acquired by issuing shares of common stock.
h. Deferred Income Taxes, a long-term liability, was reduced.
i. Short-term investments were sold.
j. Cash dividends were declared and paid.
k. Preferred stock was sold for cash.
l. Bonds were retired.
m Dividends were received on stock of another company held as an investment.
.
n. Equipment was purchased by giving a long-term note to the seller.

Required:

Prepare an answer sheet with the following column headings:

Source, Reported Not on

Use, or Activity in Separate the
Transaction Neither Operating Investing Financing Schedule Statement

Enter the letter of the transaction in the left column and indicate whether the transaction would be a source, use, or
neither. Then place an X in the appropriate column to show the proper classification of the transaction on the
statement of cash flows, or to show if it would not appear on the statement at all.

PROBLEM 13-8B Prepare a Statement of Cash Flows (Indirect Method) (LO2, LO3)

CHECK FIGURE
(1) Net cash provided by operating activities: $29

Comparative financial statements for Sinker Company follow:

Sinker Company
Comparative Balance Sheet
December 31, 2009 and 2008

2009 2008
Assets
Cash $ 37 $ 16
Accounts receivable 270 210
Inventory 150 165
Prepaid expenses 11 7
Plant and equipment 430 420
Less accumulated depreciation (94) (88)
Long-term investments 6 20
Total assets $810 $750

Liabilities and Stockholder’s Equity

 Accounts payable $280 $270
Accrued liabilities 45 82
Bonds payable 180 150
Deferred income taxes 48 40
Common stock 110 100
Retained earnings 147 108
Total liabilities and stockholders’ equity $810 $750

Sinker Company
Income Statement
For the Year Ended December 31, 2009

Sales $818
Less cost of goods sold 512
Gross margin 306
Less operating expenses 210
Net operating income 96
Nonoperating items:
Gain on sale of investments $8
Loss on sale of equipment (5) 3
Income before taxes 99
Less income taxes 30
Net income $ 69

During 2009, the company sold some equipment for $15 that had cost $45 and on which there was accumulated
depreciation of $25. In addition, the company sold long-term investments for $22 that had cost $14 when purchased
several years ago. Cash dividends totaling $30 were paid during 2009.

Required:

1. Using the indirect method, determine the net cash provided by operating activities for 2009.
2. Use the information in (1) above, along with an analysis of the remaining balance sheet accounts, to prepare a
statement of cash flows for 2009.

PROBLEM 13-9B Prepare a Statement of Cash Flows (Indirect Method) (LO2, LO3, LO4)

CHECK FIGURE
(1) Net cash used for investing activities: $168,000

Balance sheet accounts for Wally Company contained the following amounts at the end of Years 1 and 2:

Year 2 Year 1
Debit Balance Accounts
$ 4,00
Cash 0 $ 22,000
Accounts Receivable 248,000 165,000
Inventory 315,000 262,000
Prepaid Expenses 6,000 13,000
Loan to Hymas Company 40,000 0
520,00
Plant and Equipment 0 415,000
$1,133,00
Total debits 0 $877,000
 Credit Balance Accounts
$ 134,00
Accumulated Depreciation 0 $122,000
Accounts Payable 320,000 260,000
Accrued Liabilities 25,000 34,000
Bonds Payable 188,000 68,000
Deferred Income Taxes 44,000 41,000
Common Stock 305,000 273,000
117,00
Retained Earnings 0 79,000
$1,133,00
Total credits 0 $877,000

The company’s income statement for Year 2 follows:

$890,00
Sales 0
490,00
Less cost of goods sold 0
Gross margin 400,000
330,00
Less operating expenses 0
Net operating income 70,000
9,00
Gain on sale of equipment 0
Income before taxes 79,000
25,00
Less income taxes 0
$ 54,00
Net income 0

Equipment that had cost $42,000 and on which there was accumulated depreciation of $32,000 was sold during Year
2 for $19,000. Cash dividends totaling $16,000 were declared and paid during Year 2.

Required:

1. Using the indirect method, compute the net cash provided by operating activities for Year 2.
2. Prepare a statement of cash flows for Year 2.
3. Briefly explain why cash declined so sharply during the year.

PROBLEM 13-10B Worksheet; Prepare and Interpret Statement of Cash Flows (Indirect Method)
(LO2, LO3)

CHECK FIGURE
(2) Net cash used for investing activities: $558,000

“See, I told you things would work out,” said Rick Ketz, president of Ketz Corporation. “We expanded sales from
$1.6 million to over $2.0 million in 2009, nearly doubled our warehouse space, and ended the year with more cash
in the bank than we started with. A few more years of expansion like this and we’ll be the industry leaders.”
“Yes, I’ll admit our statements look pretty good,” replied Marie Cohen, the company’s vice president. “But
we’re doing business with a lot of companies we don’t know much about, and that worries me. I’ll admit, though,
that we’re certainly moving a lot of merchandise; our inventory is actually down from last year.”
A comparative balance sheet for Ketz Corporation containing data for the last two years follows:

Ketz Corporation
 Comparative Balance Sheet
December 31, 2009, and 2008

2009 2008
Assets
Current assets:
Cash $ 82,000 $ 43,000
Accounts receivable 562,000 535,000
Inventory 852,000 863,000
Prepaid expenses 11,000 6,000
Total current assets 1,507,000 1,447,000
Long-term investments 54,000 108,000
Loans to subsidiaries 132,000 82,000
Plant and equipment 3,165,000 2,600,000
Less accumulated depreciation 810,000 755,000
Net plant and equipment 2,355,000 1,845,000
Patents 85,000 92,000
Total assets $4,133,000 $3,574,000

Liabilities and Stockholders’ Equity

Current liabilities:
Accounts payable $ 352,000 $ 270,000
Accrued liabilities 81,000 85,000
Total current liabilities 433,000 355,000
Long-term notes 850,000 550,000
Deferred income taxes 84,000 78,000
Total liabilities 1,367,000 983,000
Stockholders’ equity:
Common stock 1,738,000 1,652,000
Retained earnings 1,028,000 939,000
Total stockholders’ equity 2,766,000 2,591,000
Total liabilities and stockholders’ equity $4,133,000 $3,574,000

The following additional information is available about the company’s activities during 2009.

a. Cash dividends declared and paid to the common stockholders totaled $76,000.
b. Long-term notes with a value of $370,000 were repaid during the year.
c. Equipment was sold during the year for $72,000. The equipment had cost $135,000 and had $42,000 in
accumulated depreciation on the date of sale.
d. Long-term investments were sold during the year for $120,000. These investments had cost $54,000 when
purchased several years ago.
e. The company’s income statement for 2009 follows:

Sales $2,047,000
Less cost of goods sold 1,350,000
Gross margin 697,000
Less operating expenses 495,000
Net operating income 202,000
Nonoperating items
Gain on sale of investments
$66,000
Loss on sale of equipment
(21,000) 45,000
 Income before taxes 247,000
Less income taxes 82,000
Net income $ 165,000

Required:

1. Prepare a worksheet like Exhibit 13–9 for Ketz Corporation.

2. Using the indirect method, prepare a statement of cash flows for the year 2009.
3. What problems relating to the company’s activities are revealed by the statement of cash flows that you have
prepared?

PROBLEM 13-11B Prepare and Interpret a Statement of Cash Flows (Indirect Method) (LO2, LO3,
LO4)

CHECK FIGURE
(1) Net cash provided by operating activities: $11,000

Russell Smith, president of Rusty Products, considers $14,000 to be the minimum cash balance for operating
purposes. As can be seen from the statements below, only $2,000 in cash was available at the end of 2005. Since the
company reported a large net income for the year, and also issued both bonds and common stock, the sharp decline
in cash is puzzling to Mr. Smith.

Rusty Products
Comparative Balance Sheet
December 31, 2009, and 2008

2009 2008
Assets
Current assets:
Cash $ 2,000 $ 22,000
Accounts receivable 120,000 82,000
Inventory 115,000 94,000
Prepaid expenses 4,000 8,000
Total current assets 241,000 206,000
Long-term investments 43,000 68,000
Plant and equipment 432,000 310,000
Less accumulated depreciation 60,000 50,000
Net plant and equipment 372,000 260,000
Total assets $656,000 $534,000

Liabilities and Stockholders’ Equity

Current liabilities:
Accounts payable $ 90,000 $ 62,000
Accrued liabilities 18,000 20,000
Total current liabilities 108,000 82,000
Bonds payable 50,000
Deferred income taxes 18,000 11,000
Stockholders’ equity:
Preferred stock 89,000 102,000
Common stock 295,000 254,000
Retained earnings 96,000 85,000
 Total stockholders’ equity 480,000 441,000
Total liabilities and stockholders’ equity $656,000 $534,000

Rusty Products
Income Statement
For the Year Ended December 31, 2009

Sales $507,000
Less cost of goods sold 310,000
Gross margin 197,000
Less operating expenses 162,000
Net operating income 35,000
Nonoperating items:
Gain on sale of investments $11,000
Loss on sale of equipment (3,000) 8,000
Income before taxes 43,000
Less income taxes 22,000
Net income $ 21,000

The following additional information is available for the year 2009.

a. Dividends totaling $10,000 were declared and paid in cash.
b. Equipment was sold during the year for $9,000. The equipment had originally cost $22,000 and had
accumulated depreciation of $10,000.
c. The decrease in the Preferred Stock account is the result of a conversion of preferred stock into an equal dollar
amount of common stock.
d. Long-term investments that had cost $25,000 were sold during the year for $36,000.

Required:

1. Using the indirect method, compute the net cash provided by operating activities for 2009.
2. Using the data from (1) above, and other data from the problem as needed, prepare a statement of cash flows for
2009.
3. Explain the major reasons for the decline in the company’s cash position.

Appendix 13A Problems

PROBLEM 13A-5B Prepare a Statement of Cash Flows (Direct Method) (LO2, LO5)

CHECK FIGURE
(2) Net increase in cash: $21

Refer to the financial statement data for Sinker Company in Problem 13-8B.

Required:

1. Using the direct method, adjust the company’s income statement for 2009 to a cash basis.
2. Use the information obtained in (1) above, along with an analysis of the remaining balance sheet accounts, to
prepare a statement of cash flows for 2009.

PROBLEM 13A-6B Prepare a Statement of Cash Flows (Direct Method) (LO2, LO5)
CHECK FIGURE
(1) Net cash provided by operating activities: $14,000

Refer to the financial statement data for Wally Company in Problem 13-9B. Sam Walton, president of the company,
considers $20,000 to be the minimum cash balance for operating purposes. As can be seen from the balance sheet
data, only $4,000 in cash was available at the end of the current year. The sharp decline is puzzling to Sam Walton,
particularly since sales and profits are at a record high.

Required:

1. Using the direct method, adjust the company’s income statement to a cash basis for Year 2.
2. Using the data from (1) above and other data from the problem as needed, prepare a statement of cash flows for
Year 2.
3. Explain why cash declined so sharply during the year.

PROBLEM 13A-7B Prepare and Interpret a Statement of Cash Flows (Direct Method) (LO2, LO5)

CHECK FIGURE
(2) Net cash used for investing activities: $99,000

Refer to the financial statements for Rusty Products in Problem 13-11B. Since the Cash account decreased so
dramatically during 2009, the company’s executive committee is anxious to see how the income statement would
appear on a cash basis.

Required:

1. Using the direct method, adjust the company’s income statement for 2009 to a cash basis.
2. Using the data from (1) above, and other data from the problem as needed, prepare a statement of cash flows for
2009.
3. Briefly explain the major reasons for the sharp decline in cash during the year.