Solution manual accounting 21e by warreni ch 16

$25,000 [The gain on the sale, $5,000 $25,000 proceeds from sale less $20,000 book value, would be deducted from net income in determining the cash flows from operating activities if the

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CHAPTER 16 STATEMENT OF CASH FLOWSCLASS DISCUSSION QUESTIONS

1 It is costly to accumulate the data needed.

2 It focuses on the differences between net

income and cash flows from operating

activities, and the data needed are

generally more readily available and less

costly to obtain than is the case for the

direct method.

3 In a separate schedule of noncash

investing and financing activities

accompanying the statement of cash flows.

4 a No effect

b No

5 The $25,000 increase must be added to

income from operations because the

amount of cash paid to merchandise

creditors was $25,000 less than the

amount of purchases included in the cost

of goods sold.

6 The $10,000 decrease in salaries payable

should be deducted from income to

determine the amount of cash flows from

operating activities The effect of the

decrease in the amount of salaries owed

was to pay $10,000 more cash during the

year than had been recorded as an

expense.

7 a $5,000 gain

b Cash inflow of $80,000

c The gain of $5,000 would be deducted

from net income in determining net cash flow from operating activities;

$80,000 would be reported as cash flow from investing activities.

8 Cash flow from financing activities—

issuance of bonds, $5,250,000

9 a Cash flow from investing activities—

disposal of fixed assets, $5,000 The $5,000 gain on asset disposal should be deducted from net income in determining cash flow from operating activities under the indirect method.

b No effect

10 The same The amount reported as the net

cash flow from operating activities is not affected by the use of the direct or indirect method.

11 Cash received from customers, cash

payments for merchandise, cash payments for operating expenses, cash payments for interest, cash payments for income taxes.

12 Reported in a separate schedule, as

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Ex 16–1

There were net additions, such as depreciation and amortization of intangible assets of $10.2 billion, to the net loss reported on the income statement to convert the net loss from the accrual basis to the cash basis For example, depreciation is an expense in determining net income, but it does not result in a cash outflow Thus, depreciation is added back to the net loss in order to determine cash flow from operations

The cash from operating activities detail is provided as follows for class discussion:

AOL Time Warner Cash Flows from Operating Activities (selected from Statement of Cash Flows)

(in millions) OPERATING ACTIVITIES

Net income (loss) $(4,921) Adjustments for noncash and nonoperating items:

Depreciation and amortization 9,203 Amortization of film costs 2,380 Loss on writedown of investments 2,537 Net gains on sale of investments (34) Equity in losses of other investee companies net of cash

distributions 975 Changes in operating assets and liabilities, net of acquisitions:

Receivables (484) Inventories (2,801) Accounts payable and other liabilities (1,952) Other balance sheet changes 391 Cash provided by operating activities $ 5,294

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$311,500 Deduct:

Increase in inventories $13,300 Decrease in accounts payable 6,100 19,400 Cash from operations $292,100

b Yes The amount of cash flows from operating activities reported on the statement of cash flows is not affected by the method of reporting such flows.

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Ex 16–6

Cash flows from operating activities:

Net income $ 75,000

Add: Depreciation $22,500

Decrease in accounts receivable 3,700

Increase in wages payable 3,000 29,200

$104,200 Deduct: Increase in inventories $ 5,500

Increase in prepaid expenses 400 Decrease in accounts payable 1,900 7,800 Cash from operations $96,400

Ex 16–7

Dividends declared $80,000

Add decrease in dividends payable 5,000

Dividends paid to stockholders during the year $85,000

The company probably had four quarterly payments—the first one being $25,000 declared in the preceding year and three payments of $20,000 each—of dividends declared and paid during the current year Thus, $85,000 [$25,000 + (3 × $20,000)]

is the amount of cash payments to stockholders The $20,000 of dividends payable at the end of the year will be paid in the next year.

Ex 16–8

Cash flows from investing activities:

Cash received from sale of equipment $25,000

[The gain on the sale, $5,000 ($25,000 proceeds from sale less $20,000 book value), would be deducted from net income in determining the cash flows from operating activities if the indirect method of reporting cash flows from operations is used.]

Ex 16–9

Cash received from sale of equipment $75,000

[The loss on the sale, $5,000 ($75,000 proceeds from sale less $80,000 book value), would be added to net income in determining the cash flows from operating activities if the indirect method of reporting cash flows from operations is used.]

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Ex 16–10

Cash received from sale of land $310,000

Less: Cash paid for purchase of land 300,000

(The gain on the sale of land, $60,000, would be deducted from net income in determining the cash flows from operating activities if the indirect method of reporting cash flows from operations is used.)

Ex 16–11

Cash flows from financing activities:

Cash received from sale of common stock $480,000

Less: Cash paid for dividends 240,000

Note: The stock dividend is not disclosed on the statement of cash flows.

Ex 16–12

Cash paid for purchase of land $290,000

A separate schedule of noncash investing and financing activities would report the purchase of $200,000 land with a long-term mortgage note, as follows:

Purchase of land by issuing long-term mortgage note $200,000

Ex 16–13

Cash flows from financing activities:

Cash paid to redeem bonds payable $ 48,000

Cash received from issuing bonds payable 185,000

Note: The discount amortization of $1,200 and the loss on retirement of the

bonds of $2,000 ($48,000 less the bond carrying value of $46,000 on January 1) would be shown as adjusting items (increases) in the cash flows from operating activities section under the indirect method.

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Ex 16–14

Net cash flow from operating activities $105,700

Add: Increase in accounts receivable $ 6,500

Increase in prepaid expenses 2,000

Decrease in income taxes payable 2,100

Gain on sale of investments 3,600 14,200

$119,900 Deduct: Depreciation $11,000

Decrease in inventories 6,400

Increase in accounts payable 4,700 22,100

Net income, per income statement $ 97,800

Note to Instructors: The net income must be determined by working backward

through the cash flows from operating activities section of the statement of cash flows Hence, those items which were added (deducted) to determine net cash flow from operating activities must be deducted (added) to determine net income.

Ex 16–15

Cash flows from operating activities*:

Add: Depreciation $81,594

Loss on sale of fixed assets 3,950

Decrease in accounts receivable 6,025

Decrease in merchandise inventories 33,793

Increase in accounts payable and other

accrued expenses 4,156

Increase in income tax payable 12,145 141,663

$216,759 Deduct: Increase in prepaid expenses $ 4,511

Other noncash income 7,242 11,753

Cash from operations $205,006

*Dollars in thousands

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Ex 16–16

a Sales $510,000 Plus decrease in accounts receivable balance 27,000 Cash received from customers $537,000

b Income tax expense $ 29,000 Plus decrease in income tax payable 3,900 Cash payments for income tax $ 32,900

Ex 16–17

Cost of merchandise sold $7,604* Add: Decrease in accounts payable 274 Deduct: Decrease in merchandise inventories (266) Cash paid for merchandise $7,612

b Operating expenses other than depreciation $ 80,000 Add decrease in accrued expenses 600

$ 80,600 Deduct decrease in prepaid expenses 1,000 Cash payments for operating expenses $ 79,600

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Ex 16–19

Cash received from customers $657,000 1

Deduct: Cash payments for merchandise $380,400 2

Cash payments for operating expenses 150,600 3 Cash payments for income tax 29,000 4 560,000 Net cash flow from operating activities $ 97,000 Computations:

1 Sales $645,000 Add decrease in accounts receivable 12,000 Cash received from customers $657,000

2 Cost of merchandise sold $367,800 Add: Increase in inventories $ 4,200

Decrease in accounts payable 8,400 12,600 Cash payments for merchandise $380,400

3 Operating expenses other than depreciation $155,400 Deduct: Decrease in prepaid expenses $ 2,500

Increase in accrued expenses 2,300 4,800 Cash payments for operating expenses $150,600

4 Income tax expense $ 25,400 Add decrease in income tax payable 3,600 Cash payments for income tax $ 29,000

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Ex 16–20

Cash received from customers $262,700 1

Deduct: Cash payments for merchandise $ 97,500 2

Cash payments for operating expenses 125,800 3 Cash payments for income tax 12,300 235,600 Net cash flow from operating activities $ 27,100 Computations:

1 Sales $265,000 Deduct increase in accounts receivable 2,300 Cash received from customers $262,700

2 Cost of merchandise sold $ 95,800 Add increase in inventories 5,300

$101,100 Deduct increase in accounts payable 3,600 Cash payments for merchandise $ 97,500

3 Operating expenses other than depreciation $125,700 Add decrease in accrued expenses 500

$126,200 Deduct decrease in prepaid expenses 400 Cash payments for operating expenses $125,800

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Ex 16–21

CONTEMPORARY MILLWORKS INC.

Statement of Cash Flows For the Year Ended December 31, 2006 Cash flows from operating activities:

Net income, per income statement $30

Add: Depreciation $3

Decrease in accounts receivable 2

Loss on sale of land 2 7

$37 Deduct: Increase in inventories $5

Decrease in accounts payable 3 8

Net cash flow from operating activities $29

Cash flows from investing activities: Cash received from sale of land $13

Less cash paid for purchase of equipment 17

Net cash flow used for investing activities (4)

Cash flows from financing activities: Cash received from sale of common stock $12

Less cash paid for dividends 3*

Net cash flow from financing activities 9

Increase in cash $34

Cash at the beginning of the year 16

Cash at the end of the year $50

*$4 + $0 – $1 = $3

Ex 16–22

1 The increase in accounts receivable should be deducted from net income in the cash flows from operating activities section.

2 The gain from sale of investments should be deducted from net income in the cash flows from operating activities section.

3 The increase in accounts payable should be added to net income in the cash flows from operating activities section.

4 Cash paid for dividends should be deducted from cash received from the sale

of common stock in the cash flows from financing activities section.

5 The correct amount of cash at the beginning of the year, $70,700, should be added to the increase in cash.

6 The final amount should be the amount of cash at the end of the year, $96,100.

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Ex 16–22 Concluded

A correct statement of cash flows would be as follows:

HEALTHY CHOICE NUTRITION PRODUCTS, INC.

Net income, per income statement $100,500

Add: Depreciation $ 49,000

$153,900 Deduct: Increase in accounts receivable $ 10,500

Increase in inventories 18,300 Gain on sale of investments 5,000 Decrease in accrued expenses 1,600 35,400 Net cash flow from operating activities $118,500 Cash flows from investing activities:

Cash received from sale of investments $ 85,000

Less: Cash paid for purchase of land $ 90,000

Cash paid for purchase of equipment 150,100 240,100

Net cash flow used for investing

activities (155,100) Cash flows from financing activities:

Cash received from sale of common

stock $107,000

Net cash flow provided by financing

activities 62,000 Increase in cash $ 25,400 Cash at the beginning of the year 70,700 Cash at the end of the year $ 96,100

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Common dividends: 100,000 shares × $0.20 per share = $20,000

existing capacity:

Capital expenditures $2,749 $3,393

Percent to maintain

productive capacity × 20% (550) × 20% (679) Cash dividends (492) (396) Free cash flow $ 3,760 $ 4,888 Free cash flow as a percent of cash flows

from operating activities 78.3% 81.9% Free cash flow as a percent of sales 6.4% 9.1%

c Home Depot has had strong free cash flows for both years For example, the free cash flow has been more than sufficient to fund store expansion (80% of capital expenditures) However, the free cash flow for the year ended February

2, 2003, has dropped by 23% [($4,888 – $3,760)/$4,888] from the previous year In addition, the free cash flow as a percent of sales has also dropped from 9.1% of sales to 6.4% of sales The free cash flow as a percent of cash flow from operating activities has remained near 80% Thus, while the free- cash-flow-generating ability of Home Depot is excellent, it has experienced some deterioration in between the two years The statement of cash flows reveals that much of the decline in cash flows from operating activities was caused by a significant increase in inventories during the year.

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PROBLEMS Prob 16–1A

WINNER’S EDGE SPORTING GOODS, INC.

Increase in inventories 27,100 Gain on sale of investments 12,000 Decrease in accrued

expenses 4,900 61,500 Net cash flow from operating activities $ 163,300 Cash flows from investing activities:

Cash received from sale of investments $132,000

Less: Cash paid for purchase of land $160,000

Cash paid for purchase of

equipment 120,000 280,000 Net cash flow used for investing

Cash received from sale of

common stock $105,000

Less cash paid for dividends 52,000*

*$56,000 + $10,000 – $14,000 = $52,000

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Prob 16–1A Concluded

Work Sheet for Statement of Cash Flows For the Year Ended December 31, 2006

equipment (168,000) (g) 26,000 (194,000) Accounts payable (210,500) (f) 18,200 (228,700)

Common stock (60,000) (c) 15,000 (75,000) Paid-in capital in excess of par—

Retained earnings (960,000) (b) 56,000 (a) 180,600 (1,084,600) Totals 0 453,800 453,800 0 Operating activities:

Net income (a) 180,600

Net increase in cash (m) 68,300

Totals 465,800 465,800

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Prob 16–2A

MEDALIST ATHLETIC APPAREL CO.

Increase in accounts payable 1,700

Decrease in accounts receivable 4,200 23,800

$ 85,300 Deduct: Increase in merchandise

inventory $ 5,400 Increase in prepaid expenses 1,500 6,900 Net cash flow from operating activities $ 78,400 Cash flows from investing activities:

Cash paid for equipment $ 47,500

Net cash flow used for investing

Cash received from sale of common stock $104,000

Less: Cash paid for dividends $48,000

Cash paid to retire mortgage

note payable 95,000 143,000 Net cash flow used in financing

activities (39,000) Decrease in cash $ (8,100) Cash at the beginning of the year 45,300 Cash at the end of the year $ 37,200

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MEDALIST ATHLETIC APPAREL CO.

equipment (35,800) (g) 12,500 (f) 17,900 (41,200)

Paid-in capital in excess of par—

common stock (100,000) (c) 100,000 (200,000) Retained earnings (49,600) (b) 48,000 (a) 61,500 (63,100) Totals 0 209,900 209,900 0 Operating activities:

Net income (a) 61,500

Payment of mortgage note

Net decrease in cash (l) 8,100

Totals 197,400 197,400

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Prob 16–3A

SUNRISE JUICE COMPANY Statement of Cash Flows For the Year Ended, December 31, 2006 Cash flows from operating activities:

Net loss, per income statement $ (43,800)

Decrease in prepaid expenses 2,000

Loss on sale of land 9,000 38,100

$ (5,700) Deduct: Increase in accounts receivable $ 18,400

Increase in inventory 25,400 Decrease in accounts payable 3,500 47,300 Net cash flow from operating activities $ (53,000) Cash flows from investing activities:

Cash received from land sold $ 81,000

Less: Cash paid for acquisition

of building $250,000 Cash paid for purchase

of equipment 32,900 282,900 Net cash flow used for investing

Cash received from issuance of

bonds payable $ 80,000

Cash received from issuance of

common stock 160,000 $ 240,000

activities 228,000 Decrease in cash $ (26,900) Cash at the beginning of the year 432,100 Cash at the end of the year $ 405,200

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SUNRISE JUICE COMPANY Work Sheet for Statement of Cash Flows For the Year Ended December 31, 2006

buildings (155,000) (i) 17,500 (172,500) Equipment 210,700 (h) 32,900 (g) 18,000 225,600 Accumulated depreciation—

equipment (56,500) (g) 18,000 (f) 9,600 (48,100) Accounts payable (402,600) (e) 3,500 (399,100)

Common stock (50,000) (c) 10,000 (60,000) Paid-in capital in excess of par—

common stock (200,000) (c) 150,000 (350,000) Retained earnings (1,263,300) (a) 43,800 (1,207,500)

(b) 12,000 Totals 0 404,000 404,000 0 Operating activities:

Loss on sale of land (k) 9,000

Net decrease in cash (o) 26,900

Totals 386,000 386,000

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Prob 16–4A

VILLAGE MARKETS, INC.

Cash received from customers $4,336,300 1

Deduct: Cash payments for

merchandise $2,552,900 2 Cash payments for operating

expenses 1,263,200 3 Cash payments for income tax 175,000 3,991,100 Net cash flow from operating activities $ 345,200 Cash flows from investing activities:

Less: Cash paid for purchase of land $ 230,000

Cash paid for purchase of

equipment 140,000 370,000 Net cash flow used for investing activities (220,000) Cash flows from financing activities:

Cash received from sale of common stock $ 78,000

Less: Cash paid for dividends 238,000*

Net cash flow used for financing

activities (160,000) Decrease in cash $ (34,800) Cash at the beginning of the year 456,700 Cash at the end of the year $ 421,900

Reconciliation of Net Income with Cash Flows from Operating Activities:

Increase in accounts payable 14,900

Loss on sale of investments 25,000 87,500

Increase in inventories 35,800 Decrease in accrued expenses 5,300 72,600 Net cash flow from operating activities $345,200

*Dividends paid: $241,000 + $58,000 – $61,000 = $238,000

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Prob 16–4A Continued

Computations:

1 Sales $4,367,800 Deduct increase in accounts receivable 31,500 Cash received from customers $4,336,300

2 Cost of merchandise sold $2,532,000 Add increase in inventories 35,800

$2,567,800 Deduct increase in accounts payable 14,900 Cash payments for merchandise $2,552,900

3 Operating expenses other than depreciation $1,257,900 Add decrease in accrued expenses 5,300 Cash payments for operating expenses $1,263,200

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VILLAGE MARKETS, INC.

Accounts payable (456,300) (l) 14,900 (471,200)

Paid-in capital in excess of par—

Retained earnings (1,136,400) (h) 241,000 (g) 330,300 (1,225,700) Totals 0 683,600 683,600 0

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Other operating expenses (d) 1,257,900

Net decrease in cash (q) 34,800

Totals 9,016,300 9,016,300

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Prob 16–5A

Cash received from customers $1,563,000 1

Deduct: Cash payments for merchandise $966,200 2

Cash payments for operating expenses 334,300 3 Cash payments for income tax 99,200 1,399,700 Net cash flow from operating activities $ 163,300 Cash flows from investing activities:

Less: Cash paid for land $160,000

Cash paid for equipment 120,000 280,000

Net cash flow used for investing activities (148,000) Cash flows from financing activities:

Cash received from sale of common stock $ 105,000

Less: Cash paid for dividends 52,000 4

Reconciliation of Net Income with Cash Flows from Operating Activities:

$ 224,800 Deduct: Increase in accounts receivable $ 17,500

Increase in inventories 27,100 Gain on sale of investments 12,000 Decrease in accrued expenses 4,900 61,500 Net cash flow from operating activities $ 163,300

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Computations:

1 Sales $ 1,580,500 Deduct increase in accounts receivable 17,500 Cash received from customers $ 1,563,000

2 Cost of merchandise sold $ 957,300 Add increase in inventories 27,100

$ 984,400 Deduct increase in accounts payable 18,200 Cash payments for merchandise $ 966,200

3 Operating expenses other than

depreciation $ 329,400 Add decrease in accrued expenses 4,900 Cash payments for operating expenses $ 334,300

4 Cash dividends declared $ 56,000 Deduct increase in dividends payable 4,000 Cash paid for dividends $ 52,000

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