Solution manual intermediate accounting 15e by stice ch05

Cash flow from operating activities $ 4,300Cash flow from investing activities 15,000 Cash flow from financing activities 10,000 Cash balance, beginning of year 3,200 PRACTICE 5–6 CASH C

Trang 1

CHAPTER 5

QUESTIONS

1 Cash flow from operations can offer a

clearer picture of a company's

performance than does net income when:

• A company reports large noncash

expenses, such as write-offs,

depreciation, and provisions for future

obligations Earnings may give an

overly

pessimistic view of the firm.

• A company is growing rapidly.

Reported earnings may be positive,

but operations are actually consuming

rather than generating cash.

• A company badly needs to report

favorable earnings, as is the case

before a major loan application or

before a stock offering In these cases,

cash flow from operations provides an

excellent reality check for reported

earnings.

2 To qualify as a cash equivalent when

preparing a statement of cash flows, an

item must be

(a) readily convertible to cash, and

(b) so near its maturity that there is

insignificant risk of changes in value

due to changes in interest rates.

As a general rule, only investments with

original maturities of 3 months or less

qualify The original maturity is determined

from the date of acquisition of the

investment by the entity, not the date of

original issuance of the security.

3 Operating activities include those

transactions and events that enter into the

determination of net income Cash

receipts from selling goods or from

providing services are the major cash

inflow for most businesses Major cash

instruments not intended for trading purposes.

Financing activities include transactions

and events whereby cash is obtained from

or repaid to owners (equity financing) and creditors (debt financing).

4 The normal pattern of cash flow is

• Operating—positive

• Investing—negative

• Financing—either positive or negative

5 The predecessor to the statement of cash

flows was called the statement of changes

in financial position Preparers of the

statement of changes were allowed to use either a cash emphasis or a working capital emphasis In addition, there was

no single required format for the statement

of changes in financial position.

6 The direct method reports all operating

cash receipts and cash payments The difference between cash receipts and payments is the net cash flow from operations The indirect method begins with net income as reported on the income statement, adjusts for any noncash items (such as depreciation), and converts the accrual amounts to a cash basis The result of this reconciliation process is net cash flow from operations, which will be exactly the same amount as derived using the direct method.

7 Many users favor the direct method

because it is a straightforward approach that is easy to understand Most accountants prefer the indirect method because it is easy to apply and because it helps explain or reconcile the differences between net cash flow from operations and net income Because accountants

Trang 2

When the indirect added back to net income because

depreciation was subtracted in the original computation of net income.

9 The statement, “Cash flow is equal to net

income plus depreciation” is wrong because it ignores the impact on cash from operating activities of all the changes

in current operating assets and current operating liabilities.

10 FASB Statement No 95 treats interest

payments as an operating activity in order

to be consistent with the income statement presentation The FASB defines interest payments as operating activities because interest expense enters into the calculation

of net income The FASB considered classifying interest payments as financing activities but ultimately decided on the operating activity classification.

11 The “target number” is the net change in

the cash balance, as shown in the balance sheet The sum of cash from operating, investing, and financing activities should equal the net change in cash.

12 Cost of goods sold, combined with the

change in the inventory balance, reveals how much inventory was purchased during the year Inventory purchases, coupled with the change in the accounts payable balance for the year, are used to calculate the amount of cash paid for inventory purchases.

13 A loss on the sale of a long-term asset is

omitted from the calculation of cash from operating activities when using the direct method When the indirect method is used, the loss is added back to net income because the loss was subtracted in the original computation of net income In both cases, any effects of the sale of the long-term asset are removed from the computation of operating cash flow; cash received from the sale of long-term assets

is reported as an investing activity.

14 The FASB has defined all transactions

involving available-for-sale and maturity securities as investing activities Transactions involving trading securities are included in the operating activities section.

held-to-15 If the direct method is used, a separate

schedule must be presented to reconcile

Trang 3

in) operating activities If a company elects

to use the indirect method, the amounts

paid during the period for interest and

income taxes should be disclosed.

Regardless of the method used for

reporting operating cash flows,

companies must disclose any significant

noncash investing and financing

transactions The supplemental

disclosures required by FASB Statement

No 95 can be provided in the notes to the

financial statements or in separate

schedules accompanying the statement of

cash flows.

16 Significant noncash investing and

financing transactions (e.g., the purchase

of land by issuing capital stock) are to be

reported in the notes to the financial

statements or in a separate schedule

accompanying the cash flow statement.

Because these transactions do not affect

cash, they should not be reported on the

statement of cash flows itself.

17 Under FASB Statement No 95, interest

paid is classified as an operating activity.

The provisions of IFRS 7 allow interest

paid to be classified as either an operating

activity or a financing activity.

18 The U.K number reported as cash from

operating activities excludes items, such

as interest and income taxes, that are

included in the U.S measure of operating

cash flow but that are widely viewed as

being nonoperating activities.

19 Cash from operations is usually larger than

net income This is because of the large

number of noncash expenses included in

the income statement, such as

depreciation, write-downs, and restructuring

charges.

20 When the value of a company’s cash flow

adequacy ratio is less than 1.0, that

company is not generating enough cash

from operations to pay for all new plant

and equipment purchases Accordingly,

either use the forecasted information in obtaining additional

Trang 4

its expansion plans in order to reduce the

drain on cash.

22 Lenders can use a forecasted statement of

cash flows to see whether it seems likely

existing debt obligations An investor can use the projected cash flow statement to evaluate the likelihood that a company will

be able to continue making dividend payments.

Trang 5

PRACTICE EXERCISES

PRACTICE 5–1 CASH AND CASH EQUIVALENTS

(a) Not cash equivalent because it is an equity investment; no maturity date.

(b) Cash equivalent of $5,700 because time to maturity at date of purchase was less than three months.

Investing

(a) Cash received from sale of a building $ 5,600

Financing

(c) Cash paid to repurchase shares of stock (treasury stock) (1,000)

PRACTICE 5–3 CASH FLOW PATTERNS

Company A start up, high growth

PRACTICE 5–4 NONCASH INVESTING AND FINANCING ACTIVITIES

Noncash

Trang 6

Cash flow from operating activities $ 4,300

Cash flow from investing activities (15,000)

Cash flow from financing activities 10,000

Cash balance, beginning of year 3,200

PRACTICE 5–6 CASH COLLECTED FROM CUSTOMERS

Accounts receivable, beginning $ 1,375

Cash available for collection $11,375

Less: Accounts receivable, ending 1,400

Cash collected from customers $ 9,975

PRACTICE 5–7 CASH PAID FOR INVENTORY PURCHASES

Plus: Cost of goods sold 5,300

Less: Beginning inventory 2,100

Inventory purchased this year $5,700

Accounts payable, beginning $1,200

Plus: Inventory purchased this year 5,700

Accounts to be paid $6,900

Less: Accounts payable, ending 1,350

Cash paid for inventory purchases $5,550

PRACTICE 5–8 CASH PAID FOR OPERATING EXPENSES

Prepaid operating expenses, ending$1,000

Plus: Operating expenses 3,800

Required cash outlay for operating expenses $4,800

Less: Prepaid operating expenses, beginning 700

Cash paid for operating expenses this year $4,100

Trang 7

Income Statement Adjustments Statement ofCash Flows

Cash collected from customers $ 4,290

Cash paid for inventory purchases (2,330)

Net cash flow from operating activities $ 1,550

PRACTICE 5–10 INDIRECT METHOD

Income Statement Adjustments Statement ofCash Flows

Plus: Decrease in accounts receivable 290

Less: Decrease in accounts payable (130)

Less: Decrease in interest payable (60)

Net cash flow from operating activities $1,550

Trang 8

Operating activities:

Net cash flow from operating activities $ 430

Investing activities:

(c) Cash received from sale of a building $ 5,600

(k) Cash paid to purchase machinery (1,950)

Net cash flow from investing activities $ 3,650

Financing activities:

(h) Cash received from issuance of new shares of common stock 1,200

Net cash flow from financing activities (580) $

PRACTICE 5–12 OPERATING CASH FLOW: GAINS AND LOSSES

Less: Increase in accounts receivable (300)

Less: Decrease in income taxes payable(170)

Less: Gain on sale of equipment (440)

Plus: Loss on sale of building 210

Net cash flow from operating activities$ 550

PRACTICE 5–13 OPERATING CASH FLOW: RESTRUCTURING CHARGES

Plus: Decrease in inventory 300

Plus: Increase in wages payable 170

Plus: Restructuring charge 2,300

Net cash flow from operating activities$4,270

PRACTICE 5–14 OPERATING CASH FLOW: DEFERRED INCOME TAXES

Reported income tax expense $20,000

Less: Increase in deferred tax liability 1,250

Taxes owed for current year operations$18,750

Less: Increase in income taxes payable 120

Cash paid for income taxes $18,630

Trang 9

Sales $10,000

Plus: Accounts receivable, beginning 1,430

Less: Deferred sales revenue, beginning (cash already collected) (750)

Cash available for collection this year $10,680

Less: Accounts receivable, ending (1,250)

Plus: Deferred sales revenue, ending (collected for future years) 1,000

Total cash collections from customers $10,430

PRACTICE 5–16 OPERATING CASH FLOW: PREPAID OPERATING EXPENSES

Cash paid for depreciation $ 0

Cash paid for insurance:

Required cash outlay for insurance $9,000

Less: Prepaid insurance, beginning 1,430

Cash paid for insurance this year $7,570

Cash paid for wages:

Plus: Wage expense this year 14,600

Less: Wages payable, ending 600

Cash paid for wages this year $14,750

Cash paid for operating expenses: $0 + $7,570 + $14,750 = $22,320

PRACTICE 5–17 COMPUTING CASH PAID TO PURCHASE PROPERTY, PLANT, AND EQUIPMENT

Less: PPE sold during the year 35,000

Ending PPE without purchase of new PPE $ 71,000

Less: Ending PPE without purchase of new PPE 71,000

Cash paid to purchase new PPE $ 41,000

This assumes that all PPE purchases were for cash.

Trang 10

Accumulated depreciation, beginning $44,000

Ending accumulated depreciation without PPE sale$54,000

Less: Actual ending accumulated depreciation 31,000

Accumulated depreciation associated with PPE sold$23,000

Accumulated depreciation associated with PPE sold 23,000

Cash received from sale of PPE $16,500

PRACTICE 5–19 COMPUTING CASH PAID FOR DIVIDENDS

Retained earnings, beginning $106,000

Ending retained earnings without dividend declarations$116,000

Less: Actual ending retained earnings 112,000

Dividends declared during the year $ 4,000

Plus: Decrease in dividends payable 250

Cash paid for dividends this year $ 4,250

PRACTICE 5–20 STATEMENT OF CASH FLOWS IN THE UNITED KINGDOM

1 U.S approach

Net cash flow from operating activities $ 430

2 U.K approach

(a) Cash paid to purchase inventory (7,800)

Under the U.K approach, cash paid for interest and cash paid for income taxes are not

shown as part of operating activities.

Trang 11

1 Cash flow-to-net income

Cash flow from operating activities $14,000

Cash-flow-to-net-income ratio 1.40

2 Cash flow adequacy

Cash paid for capital expenditures $25,000

Cash paid for acquisitions 15,000

Cash required for investing activities $40,000

Cash required for investing activities ÷$40,000

Cash flow adequacy ratio 0.35

3 Cash times interest earned

Cash paid for income taxes 7,500

Operating cash flow before interest and taxes$27,000

Cash paid for interest ÷ $5,500

Cash times interest earned ratio 4.91

PRACTICE 5–22 PREPARING A FORECASTED STATEMENT OF CASH FLOWS

Operating activities:

Less: Increase in accounts receivable(180)

Less: Increase in inventory (390)

Plus: Increase in accounts payable 150

New long-term debt $ 1,000

Cash paid for dividends

Trang 12

(o) Noncash transaction; report separately.

(p) Noncash item; ignore under direct method; add back to net income under indirect method.

(q) Investing activity

(r) Investing activity

5–24 (a) The purchase of securities classified as available-for-sale is reported as

cash used to acquire those securities, an investing activity.

(b) The acquisition of buildings for $50,000 should be reported as a use of cash from investing activities The balance ($137,500) is a significant noncash transaction that should be reported separately in the notes or

an accompanying schedule to the statement of cash flows.

(c) The purchase of business assets is reported as an investing activity as follows:

Cash was used to:

Purchase inventory $ 22,500 Purchase furniture and fixtures 7,500 Purchase land and buildings 23,750 Purchase goodwill 8,750 $62,500 Note that the entire amount of the business purchase is reported as a cash outflow from investing activities even though some of the assets ($22,500

in inventory) are operating assets.

(d) The declaration of dividends is not reported as a use of cash because

this had no effect on cash When the dividend payable is paid, the cash outflow will be shown as a financing activity.

(e) The decrease in Accounts Payable is reported as an item to be deducted in computing net cash flow provided by (used in) operations Cash payments for purchases includes payment for purchases of the previous period.

Trang 13

from sale of equipment Both are investing activities (Note: The $3,000 loss on sale would be added to net income when using the indirect method.)

Equipment

(b) No cash is provided or used by depreciation; however, $6,500 is added

to net income for yearly depreciation in showing net cash flow provided

by operations when using the indirect method.

Accumulated Depreciation

(a) Operating activities:

Cash collected from customers $275,500

Cash paid for inventory $195,990

Cash paid for salaries 35,050

Trang 14

(b) Operating activities:

Add: Depreciation $16,700

Decrease in inventory 1,760 Increase in salaries payable 150 18,610 Less: Increase in accounts receivable $ 3,200

Decrease in accounts payable 750 (3,950) Net cash provided by operating activities 20,160 $

(a) Operating activities:

Cash collected from customers $827,900

Cash paid for inventory $448,250

Cash paid for interest 12,600

Cash paid for income taxes 56,350

Cash paid for other expenses 88,200 (726,750)

Net cash provided by operating activities $101,150

(b) Operating activities:

Decrease in inventory 2,800

Increase in accounts payable 3,450 44,250

Less: Increase in accounts receivable $ 7,500

Decrease in interest payable 400

Decrease in income taxes payable 350

Increase in prepaid expenses 700 (8,950)

Net cash provided by operating activities $101,150

Trang 15

Carter Corporation Statement of Cash Flows For the Year Ended December 31, 2005

Cash flows from operating activities:

Net income $ 55,000

Adjustments:

Depreciation expense 7,000 Amortization of patent 4,000 Gain on sale of land (6,000) Decrease in accounts receivable 2,100 Increase in inventory (1,200) Increase in accounts payable 1,500 Net cash provided by operating activities $ 62,400

Cash flows from investing activities:

Proceeds from sale of land $ 35,000

Purchase of equipment (33,200)

Net cash provided by investing activities 1,800

Cash flows from financing activities :

Retirement of long-term debt $(40,000)

Issuance of bonds 30,000

Issuance of common stock 25,000

Payment of dividends (22,500)

Net cash used in financing activities (7,500)

Net increase in cash $ 56,700 Cash balance at beginning of year 82,800 Cash balance at end of year $ 139,500 5–29.

Net income $ 35,500 Adjustments:

Depreciation expense $ 7,000 Increase in accounts receivable (2,150) Decrease in accounts payable (2,500) Increase in inventories (4,500) Increase in other current liabilities 2,000 Decrease in prepaid insurance 800 650 Net cash provided by operating activities $ 36,150

Trang 16

Income Statement Adjustments Cash Flows

Sales $6,000,000 $(400,000) $5,600,000 Increase in

receivables Cost of goods

sold (2,800,000) 60,000 (2,156,000) Decrease in inventories

140,000 Increase in trade

payables 420,000 Amount of

depreciation related

to manufacturing 24,000 Increase in accrued

expenses related to manufacturing Selling, general,

(10,000) Increase in prepaid

selling expense 180,000 Amount of

depreciation related

to selling Income taxes (520,000) 48,000 (472,000) Increase in taxes

payable Net income $ 680,000 $1,150,000 Cash from operating

activities

5–31.

Net income $ 90,000 Adjustments:

Depreciation $ 60,000 Amortization 10,000 Decrease in accounts receivable 13,000 Increase in inventory (8,000) Decrease in accounts payable (3,400) Decrease in interest payable (1,000) 70,600 Net cash provided by operating activities $ 160,600

Trang 17

Cash receipts from customers $ 513,000 (a) Cash payments for:

Inventory $ 311,400 (b) Operating expenses 36,500 (c) Interest 4,500 (d) 352,400 Net cash provided by operating activities $ 160,600 COMPUTATIONS:

= Purchases $308,000 + Beginning accounts payable 59,400 – Ending accounts payable (56,000)

= Cash paid for inventory $ 311,400 (c) Sales $500,000

Cost of goods sold (except depreciation) 300,000 Gross margin $200,000 Less expenses 110,000*

Net income $ 90,000

*$200,000 gross margin – $90,000 net income = $110,000 Expenses $ 110,000 Less noncash items:

Depreciation expense $ 60,000 Amortization expense 10,000 70,000

$ 40,000 Less: Interest expense 3,500 Cash paid for operating expenses $ 36,500 (d) Interest expense on short-term debt for year $ 3,500

+ Beginning interest payable 1,000 – Ending interest payable 0

= Cash paid for interest $ 4,500

Trang 18

1 Cash collected from accounts receivable:

Accounts receivable, beginning balance $ 254,000 Sales in 2005 3,561,000 Total collectible accounts $3,815,000 Less: Accounts receivable, ending balance 312,000 Cash collected in 2005 $ 3,503,000

2 Cash paid on accounts payable:

Inventory, ending balance $ 278,000 Add: Cost of goods sold in 2005 2,789,000 Total goods available in 2005 $3,067,000 Less: Inventory, beginning balance 239,000 Inventory purchases in 2005 $ 2,828,000 Accounts payable, beginning balance $ 198,000 Add: Inventory purchases in 2005 2,828,000 Total accounts to be paid in 2005 $3,026,000 Less: Accounts payable, ending balance 212,000 Total cash paid on accounts payable in 2005 $ 2,814,000

3 Cash dividend payment:

Retained earnings, beginning balance $ 144,000 Add: Net income, 2005 251,000

$ 395,000 Less: Retained earnings, ending balance 188,000 Total dividends declared $ 207,000 Less: Increase in dividends payable 40,000 Total cash dividend payment in 2005 $ 167,000

4 Cash receipts not provided by operations:

Cash provided from financing:

Notes payable* $ 125,000 Common stock ($600,000 – $550,000) 50,000 Cash receipts not provided by operations $ 175,000

5 Cash payments for assets not reflected in operations:

Available-for-sale securities $ 59,000 Property, plant, and equipment* ($536,000 – $409,000) 127,000 Cash payments for assets not reflected in operations $ 186,000

*If the notes payable mentioned in (4) were issued as direct payment for the property, plant, and equipment in (5), this transaction would be a noncash transaction and would be disclosed separately from the cash flow statement.

Trang 19

Boswell Manufacturing Company Statement of Cash Flows (Indirect method) For the Year Ended December 31, 2005

Net income $ 320,800

Adjustments:

Depreciation expense 60,000 Intangible assets amortization 30,000 Increase in accounts receivable (13,000) Increase in inventory (30,000) Decrease in accounts payable (34,800) Increase in interest payable 8,100 Increase in wages payable 72,000 Net cash provided by operating activities $413,100

Purchase of machinery $ (48,000)

Net cash used in investing activities (48,000)

Cash flows from financing activities:

Retirement of long-term debt $ (450,000)

Sale of common stock 150,000

Net increase in cash and cash equivalents $ 47,100 Cash and cash equivalents at beginning of year 140,000

Cash and cash equivalents at end of year $ 187,100

Trang 20

Sunnyvale Corporation Statement of Cash Flows (Indirect method) For the Year Ended December 31, 2005

Net income $ 280,000

Adjustments:

Depreciation expense 300,000 Gain on sale of equipment (3,000) Increase in accounts receivable (15,000) Increase in merchandise inventory (96,000) Decrease in prepaid insurance 1,500 Decrease in accounts payable (331,500) Decrease in salaries payable (30,000) Net cash provided by operating activities $ 106,000

Sale of equipment $ 18,000

Purchase of buildings and equipment (1,240,500)

Net cash used in investing activities (1,222,500)

Issuance of long-term note $1,500,000

Payment of note payable at bank (450,000)

Net cash provided by financing activities 960,000

Net decrease in cash and cash equivalents $ (156,500) Cash and cash equivalents at beginning of year 675,000

Trang 21

LaForge Company Statement of Cash Flows (Indirect Method) For the Year Ended December 31, 2005

(Dollars in thousands)

Net income $ 70

Adjustments: Depreciation expense $ 60

Decrease in accounts receivable 50

Increase in inventory (30)

Increase in prepaid general expenses (8)

Increase in accounts payable 25

Increase in interest payable 2

Decrease in income taxes payable (17)

82 Net cash provided by operating activities $ 152

Cash flows from investing activities: Sale of plant assets $ 200

Purchase of plant assets (349) (a) Net cash used in investing activities (149)

Cash flows from financing activities: Issuance of bonds payable $ 40 (b) Issuance of common stock 38 (c) Payment of cash dividends (75)

Net cash provided by financing activities 3

Net increase in cash and cash equivalents $ 6

Cash and cash equivalents at beginning of year 16

Cash and cash equivalents at end of year $ 22

COMPUTATIONS: (a) Beginning plant assets $1,000 Less: Plant assets sold 330

$ 670 Add: Ending plant assets 1,019 Difference (plant assets purchased) $ 349

(b) Beginning bonds payable $ 77

Ending bonds payable 117

Increase (bonds payable issued) $ 40

Trang 22

The following table also can be used in computing cash from operating activities.

Income Statement Adjustments from Operations Cash Flows

Cost of goods sold (880) (b) (30)

(c) 25 (885) Depreciation expense (60) (d) 60 0

General expenses (240) (e) (8) (248)

(c) Increase in accounts payable

(d) Amount of reported depreciation expense

(e) Increase in prepaid general expenses

(f) Increase in interest payable

(g) Decrease in income taxes payable

Trang 23

LaForge Company Statement of Cash Flows (Direct method) For the Year Ended December 31, 2005

(Dollars in thousands)

Cash receipts from customers $1,350 (a) Cash payments for:

Purchases of inventory $(885) (b) General expenses (248) (c) Interest (13) (d) Income tax (52) (e) (1,198) Net cash provided by operating activities $ 152

Sale of plant assets $ 200

Purchase of plant assets (349)

Net cash used in investing activities (149)

Issuance of bonds payable $ 40

Issuance of common stock 38

Payment of cash dividends (75)

Net increase in cash and cash equivalents $ 6

Cash and cash equivalents at beginning of year 16 Cash and cash equivalents at end of year $ 22

COMPUTATIONS:

(a) Sales $1,300 + Beginning accounts receivable 250 – Ending accounts receivable (200)

= Cash receipts from customers $ 1,350 (b) Cost of goods sold $ 880 – Beginning inventory (95) + Ending inventory 125

= Inventory purchases $ 910 + Beginning accounts payable 50 – Ending accounts payable (75)

= Cash payments for inventory purchases $ 885 (c) General expenses $ 240 – Beginning prepaid general expenses (10) + Ending prepaid general expenses 18

Trang 24

(e) Income tax expense $ 35 + Beginning income taxes payable 107 – Ending income taxes payable (90)

= Cash payments for income tax $ 52 The following table also can be used in computing cash from operating activities.

Income Statement Adjustments

Cash Flows from Operations

Cost of goods sold (880) (b) (30)

(c) 25 (885) Depreciation expense (60) (d) 60 0

General expenses (240) (e) (8) (248)

(c) Increase in accounts payable

(d) Amount of reported depreciation expense

(e) Increase in prepaid general expenses

(f) Increase in interest payable

(g) Decrease in income taxes payable

Trang 25

2006 Income Statement 2005 Forecasted

Cost of goods sold 700 770 35% of sales,

same as last year Gross profit $1,300 $1,430

Depreciation expense 120 160 20% of PP&E,

same as last year Other operating expenses 1,010 1,111 50.5% of sales,

same as last year Operating profit $ 170 $ 159

Interest expense 90 75 15% of bank loan,

same as last year Income before taxes $ 80 $ 84

Income taxes 30 32 37.5% of pretax,

same as last year Net income $ 50 $ 52

Trang 26

Net income $ 52 Adjustments:

Depreciation $ 160 Increase in other current assets (50) Increase in accounts payable 20 130 Net cash provided by operating activities $182

Purchase of property, plant, and equipment $(360) (a)

Repayment of bank loans payable $ (100) (b)

Issuance of common stock 280 (c)

Net increase in cash and cash equivalents $ 2 Cash and cash equivalents at beginning of year 20

Cash and cash equivalents at end of year $ 22 COMPUTATIONS:

(a) Beginning property, plant, and equipment $600 Less: Depreciation expense 160

$440 Ending property, plant, and equipment 800 Difference (assets purchased) $360 (b) Beginning bank loans payable $600 Ending bank loans payable 500 Decrease (bank loans repaid) $100 (c) Beginning stockholders’ equity $320 Plus: Increase from forecasted net income 52 Less: Decrease from forecasted cash dividends (0) Total stockholders’ equity with no new stock $372 Ending stockholders’ equity 652 Increase (common stock issued) $280

Trang 27

2006 Balance Sheet 2005 Forecasted

Other current assets 250 375 50% natural increase Property, plant, and equipment, net 800 800 more efficient, item (b) Total assets $ 1,060 $ 1,190

Accounts payable $ 100 $ 150 50% natural increase Bank loans payable 700 900 New loan of $200, item (c) Total stockholders’ equity 260 140 To balance

Total liabilities and stockholders’ equity $ 1,060 $ 1,190

2.

2006 Income Statement 2005 Forecasted

Sales $1,000 $1,500 Given, item (a)

Cost of goods sold 750 1,125 75% of sales,

same as last year

Depreciation expense 40 40 5% of PP&E,

same as last year Other operating expenses 80 120 8% of sales,

same as last year Operating profit $ 130 $ 215

Interest expense 70 90 10% of bank loan,

same as last year Income before income taxes $ 60 $ 125

Income taxes 20 42 33.3% of pretax,

same as last year Net income $ 40 $ 83

Trang 28

Net income $ 83 Adjustments:

Depreciation expense $ 40 Increase in other current assets (125) Increase in accounts payable 50 (35) Net cash provided by operating activities $ 48

Purchase of property, plant, and equipment $ (40) (a)

New bank loans payable $ 200 (b)

Repurchase of common stock (203) (c)

Net cash provided by financing activities (3)

Net increase in cash and cash equivalents $ 5 Cash and cash equivalents at beginning of year 10

Cash and cash equivalents at end of year $ 15 COMPUTATIONS:

(a) Beginning property, plant, and equipment $ 800 Less: Depreciation expense 40

$ 760 Ending property, plant, and equipment 800 Difference (assets purchased) $ 40 (b) Beginning bank loans payable $ 700 Ending bank loans payable 900 Increase (new bank loans) $ 200 (c) Beginning stockholders’ equity $ 260 Plus: Increase from forecasted net income 83 Less: Decrease from forecasted cash dividends (0) Total stockholders’ equity with no new stock $ 343 Ending stockholders’ equity 140 Decrease (common stock repurchased) $ (203)

Trang 29

Statement of Cash Flows

1 Cash flows from operating activities:

Cash collected from customers $1,505,600

Cash received for interest 17,400 $1,523,000 Cash paid for inventory $ 916,950

Cash paid for general expenses 261,250

Cash paid for interest 12,700

Cash paid for income taxes 83,750 1,384,500 Net cash provided by operating activities $ 138,500

2 Cash flows from operating activities:

Net income $ 151,750 Add: Depreciation expense $ 23,500

Loss on sale of equipment 9,500

Decrease in interest receivable 150

Increase in salaries payable 4,450

Increase in income taxes payable 1,750 39,350 Less: Increase in accounts receivable $ 25,000

Increase in inventory 14,750

Decrease in accounts payable 6,800

Decrease in interest payable 200

Increase in prepaid general expenses 3,600

Decrease in accrued general expenses 2,250 (52,600) Net cash provided by operating activities $ 138,500

Trang 30

Amber Company Statement of Cash Flows (Indirect method) For the Year Ended December 31, 2005

Decrease in supplier short-term notes payable (20,000)

Increase in accounts payable 25,000

Net cash provided by operating activities $ 98,000

Purchase of equipment* $ (25,000)

Retirement of bonds $ (50,000)

Net increase in cash and cash equivalents $ 13,000 Cash and cash equivalents at beginning of year 28,000

*An additional $25,000 of equipment was purchased with a long-term note.

Trang 31

Alderman Produce Company Statement of Cash Flows (Indirect method) For the Year Ended June 30, 2005

Increase in accounts payable 4,000

Net cash provided by operating activities $ 64,500

Proceeds from sale of investment $ 5,000

Purchase of equipment (27,000)

Retirement of bonds payable $ (70,000)

Borrowed on long-term notes 20,000

Issuance of capital stock 50,000

Purchase of treasury stock (1,500)

Net increase in cash $ 11,000 Cash balance at beginning of year 20,000

Cash balance at end of year $ 31,000

2 Apparently, Alderman tried to restructure its financing mix by issuing capital stock and by borrowing on long-term notes The proceeds from these transactions were used to retire outstanding bonds payable Alderman’s cash from operations was sufficient to cover both expenditures for long-term assets and cash dividend payments This excess is a good indication to anyone considering lending money to, or investing in, Alderman.

Định dạng
Số trang	63
Dung lượng	313 KB