WONG FURNITURE COMPANY Statement of Cash Flows For the Year Ended December 31, 20X1 in thousands Cash flows from operating activities Cash disbursed for operating activities 1,096 Ca
Trang 1CHAPTER 16 COVERAGE OF LEARNING OBJECTIVES
LEARNING OBJECTIVE
FUNDAMENTAL ASSIGNMENT MATERIAL
ADDITIONAL ASSIGNMENT MATERIAL
EXCEL, COLLAB., & INTERNET EXERCISES LO1: Recognize and define the
main types of assets in the balance
sheet of a corporation
A1, B1 36, 37, 41, 42
59, 61, 62, 63
74, 75
LO2: Recognize and define the
main types of liabilities in the
balance sheet of a corporation
A1, B1 42, 60, 61, 62 74, 75
LO3: Recognize and define the
main elements of the stockholders’
equity section of the balance sheet
of a corporation
LO4: Recognize and define the
principal elements in the income
statement of a corporation
63, 72
74, 75
LO5: Recognize and define the
elements that cause changes in
retained earnings
61, 72
LO6: Identify activities that affect
cash, and classify them as
operating, investing, or financing
activities
A2, B2 43, 44, 45, 46,
49, 52, 53, 64,
65, 72
LO7: Assess financing and
investing activities using the
statement of cash flows
A2, B2 39, 49, 52, 53
LO8: Use both the direct method
and the indirect method to explain
cash flows from operating
LO9: Explain the role of
depreciation in the statement of
cash flows
36, 51
LO10: Describe and assess the
effects of the four main methods of
accounting for inventories
(Appendix 16A)
54, 55, 56, 57,
58, 68, 69, 70, 71
73, 75
Trang 2CHAPTER 16 Understanding Corporate Annual Reports: Basic Financial
Statements
16-A1 (20-25 min.)
LORING COMPANY Balance Sheet December 31, 20X0 ASSETS:
Current assets:
Noncurrent assets:
Property, plant, and equipment, at cost 580,000
Property, plant, and equipment, net 410,000
Trang 3LIABILITIES AND SHAREHOLDERS' EQUITY:
Current liabilities:
Noncurrent liabilities:
Long-term debt, excluding current portion 210,000
Shareholders' equity:
Total liabilities and shareholders' equity $738,000
* To determine the amount of additional paid-in capital, you must begin by computing total liabilities and shareholders' equity = total assets = $738,000 Then:
Total shareholders' equity = $738,000 - current liab - noncurrent liab
= $738,000 - $136,000 - $254,000
= $348,000 Additional paid-in capital = shareholders' equity - common stock - retained earnings
= $348,000 - $25,000 - $ 202,000
= $121,000
Trang 4LORING COMPANY Income Statement For the Year Ended December 31, 20X0
Other income (expense):
Trang 516-A2 (15-20 min.) Although the requirements do not call for it, many students will find it useful to prepare a balance sheet equation (without beginning balances, which are not given) Comparing the entries in the Cash column to those in the Retained Earnings column shows why net income differs from cash provided by operations This understanding is necessary to interpret (or prepare) the
schedule that reconciles net income to net cash provided by
operating activities (see 16-A3)
WONG FURNITURE COMPANY
Statement of Cash Flows For the Year Ended December 31, 20X1
(in thousands) Cash flows from operating activities
Cash disbursed for operating activities (1,096)
Cash flows from investing activities:
Cash flows from financing activities:
Net cash provided by financing activities 71
Trang 616-A3 (10-15 min.)
WONG FURNITURE COMPANY Supporting Schedule to Statement of Cash Flows Reconciliation of Net Income to Net Cash Provided by
Operating Activities For the Year Ended December 31, 20X1
(in thousands)
Adjustments to reconcile net income to net cash
provided by operating activities:
Add: Depreciation, which was included in computing
computing net income but does not affect cash 48
Deduct: Increase in accounts receivable (250) [1,600-1,350]
Add: Increase in accounts payable 125 [900-775] Add: Increase in salaries and wages payable 10 [190-180] Add: Increase in income taxes payable 10 [40-30]
Net cash provided by operating activities $254
Less expenses:
Cost of goods sold $850
Salaries & wages 190
Trang 7Net cash provided by operating activities $185,000
Nondepreciation expenses [600,000-90,000] (510,000)
Net cash provided by operating activities $ 185,000
Notice that the additional depreciation expense did not affect net cash provided by operating activities The direct method clearly shows this phenomenon:
Direct method:
Net cash provided by operating activities $ 185,000
Trang 816-B1 (15-20 min.)
INTEL Balance Sheet December 31, 2005 (in millions) ASSETS
Property, plant, and equipment, at cost $44,132
Deferred income on shipments to distributors 632
Common shareholders' equity:
Common stock and capital in excess of par value $ 6,245
*Total Current Liabilities = $48,314 - $36,182 - $2,106 - $703 - $89 = $9,234
Accounts Payable = $9,234 - $313 - $2,110 - $632 - $1,970 - $1,960 = $2,249
Trang 916-B2 (25 min.) This is a good exercise in recognizing items that fit in a Statement of Cash Flows and placing them in the proper section of the
statement Three items listed in the problem do not appear in a Statement of Cash Flows: net sales, retained earnings, and total assets
WALGREEN COMPANY Statement of Cash Flows For the Year Ended August 31, 2005
(in millions) Cash flows from operating activities:
Adjustments to reconcile net earning to net cash provided by
operating activities:
Cash (Used for) Provided by Investing Activities:
Cash (Used for) Provided by Financing Activities:
Changes in Cash and Cash Equivalents:
Trang 1016-B3 (10-15 min.)
All of the items listed, except provision for income taxes and interest expense, are additions to (or deductions from) net income that are required in computing net cash flow from operating
activities The main problem is to decide whether each one should
be added to or deducted from net income
TARGET CORPORATION Supporting Schedule to Statement of Cash Flows Reconciliation of Net Income to Net Cash Provided by
Operating Activities For the Year Ended January 28, 2006
(in millions)
Add non-cash expenses:
Deduct increases in non-cash current assets:
The net cash from operating activities exceeds net income by $4,451
- $2,408 = $2,043 million, primarily due to the add back of $1,409 +
$457 = $1,866 of depreciation and other non-cash expenses
Trang 1116-1 The operating cycle is the time span during which cash is
spent to acquire goods and services that are used to produce the
organization's output, which in turn is sold to customers, who in turn pay for their purchases in cash For some firms, such as large construction companies, this may be much longer than one year
16-2 Prepaid expenses belong in current assets because if they were not present more cash would be needed to conduct current
operations
16-3 Current assets usually include cash and cash equivalents,
trade receivables, inventories, and prepaid expenses
16-4 Accumulated depreciation is not cash; if specific cash is being accumulated for the replacement of assets, such cash will be an asset specifically labeled as a "cash fund for replacement and expansion."
16-5 Depreciation is a method of cost allocation, not valuation
Therefore, it represents the decrease in book value but not the
decrease in market value
16-6 The useful life of depreciable assets is most heavily influenced
by economic obsolescence and technological changes rather than physical wear and tear
16-7 No Capitalizing an amount means only that it will not
immediately be charged as an expense It will be charged as an
expense over the useful life of the capitalized asset
16-8 Yes Goodwill is simply the excess of the purchase price over the current value of the separable assets acquired less the liabilities
Trang 1216-9 Yes Working capital is current assets less current liabilities,
so it shows how much cash should be available in the next year (or the next operating cycle, if longer) to pay current liabilities that come due in that period
16-10 Subordinated debentures are like any long-term debt except that "subordinated" means that such bondholders are junior to other general creditors in exercising claims against assets, and
"debenture" means a general claim against all unencumbered assets rather than a specific claim against particular assets
16-11 Unlike individual proprietors or partners, stockholders'
personal assets cannot be confiscated to satisfy the debts of an
incorporated entity
16-12 Stock frequently has a designated par or legal or stated value
that is printed on the face of the certificate For preferred stock (and bonds), par is a basis for computing the amount of dividends (or interest) Par value of common stock has no practical
importance Historically, it was used for establishing the maximum legal liability of the stockholder in case the corporation could not pay its debts Currently, it is set at a nominal amount (say $1 or even 1¢) in relation to the market value of the stock upon issuance (say $20)
16-13 Treasury stock is indeed negative stockholders' equity It is a
contraction of or deduction from outstanding capital stock It is not
Trang 1316-15 No The statement of cash flows is a required statement with a required format
16-16 A cash flows statement aids in predicting future cash flows, evaluating management's generation and use of cash, and
determining a company's ability to pay dividends and interest and pay debts when due It also reveals commitments to assets that may restrict or expand future courses of action
16-17 Operating activities, investing activities, and financing
activities are the three major types of activities summarized in the statement of cash flows
16-18 Major operating activities include collections from customers, collections of interest or dividends, payments to suppliers, payments
to employees, payments for interest, and payments for taxes
16-19 Major investing activities include sales and purchases of
property, plant, and equipment, sales and purchases of securities that are not cash equivalents, and making and collecting loans
16-20 Major financing activities include borrowing from creditors, issuing equity securities, repaying creditors, repurchasing equity securities, and paying dividends
16-21 Interest paid or received appears in the operating activities section Some commentators favor showing interest paid as a
financing activity and interest received as an investing activity
However, the FASB decided that, because interest income and
interest expense are included in income, they should be included in operating activities
Trang 1416-22 Borrowing or repaying cash are not investment activities They are financing activities because they provide capital to the
company
16-23 The investing section of the statement of cash flows shows the total cash received when a company sells an asset The book value is irrelevant (except for its impact on income taxes) Thus, the $8,000 cash received would be cash provided by investing activities
16-24 Non-cash investing and financing activities generally could have been accomplished identically in substance (though not in
form) by cash transactions For example, issuing debt to purchase
an asset could have been accomplished by issuing debt for cash and then using the cash to purchase the asset Companies should not be able to prevent disclosure of such a transaction to readers of the statement of cash flows simply by using a non-cash form of
transaction
16-25 The direct method and indirect method are the two major ways of computing net cash provided by operating activities The direct method shows cash inflows and outflows directly The
indirect method begins with net income and adds adjustments to get net cash provided by operating activities
16-26 The erroneous impression is that depreciation and other
noncash expenses are sources of cash Depreciation is an allocation
of original cost to expense that does not entail a current outlay of cash; that is, depreciation is a non-cash expense It is added to net income when using the indirect method only to offset its deduction in computing net income
16-27 Sales revenue is recognized on an accrual basis, not a cash basis Therefore, cash collections from customers will not ordinarily equal sales revenues during any given period
Trang 1516-28 Cash flow from operations does not recognize the investment necessary to replace the fixed resources used in generating the
period’s revenues If a company does not generate enough cash to both carry out its operations and to replace the assets it uses up, it cannot stay in business long Free cash flow tells us whether the cash generated by operations is enough to support the investment needs of the company
16-29 Depreciation belongs in a supporting schedule to the body of the statement of cash flows Depreciation is one of the items that reconciles net income to net cash flow from operating activities However, it does not appear on a direct-method cash flow statement because it does not directly affect cash
16-30 The newsletter reinforces the widely held erroneous
impression that depreciation provides cash
16-31 Specific identification recognizes the actual cost paid for the particular physical item sold First-in, first-out (FIFO) assumes that the items acquired earliest are sold or used up first Last-in, last-out (LIFO) assumes that the items acquired most recently are sold or used up first Weighted average assumes that the cost of all items available for sale during the period are divided by the number of items to get an average unit cost
16-32 FIFO will have the highest net income, because the older (and hence lower cost) items comprise the cost of goods sold, making cost
of goods sold lower and net income higher
16-33 Purchases under LIFO can affect income immediately,
because the latest purchases are regarded as cost of goods sold
Trang 1616-34 No It is true that if replacement cost falls and lower ultimate sales prices are expected, the inventory is written down But once
written down, the inventory is never written up again The cost to
which inventory is written down becomes the "new cost" and is
therefore the ceiling for any future valuation of the inventory
16-35 No The opposite is true Tax expense on reports to
shareholders has exceeded the actual tax payments
16-36 Most accounting measures are based on historical cost, not market values Companies record fixed assets at the cost paid for them, and they spread this cost as depreciation over the years they expect to use the asset The book value of the asset is the remainder
of the cost that has not yet been charged as depreciation expense; it
is not intended to be even an approximation of the market price of the asset When asset values increase, U.S GAAP does not allow a revaluation upward of the asset’s book value In come countries, such revaluation is allowed in specific circumstances If it were
allowed, fixed asset book values would be closer to the market values
of the assets
Trang 1716-37 Companies invest in research and development (R&D)
activities because they believe such investments will bring future value In one sense, investments in R&D are like investments in
fixed assets – they are worthwhile only if the value created is greater than the cost of the investment Thus, recognizing the future value
of investments in R&D is important for decision making This
would be more consistent with a policy of capitalizing R&D
expenditures than with expensing them immediately The value created is often very uncertain, but it is certainly not expected to be zero, the amount implicitly assumed by expensing R&D
expenditures It is the subjectivity in estimating the future value of R&D investments and the possibility of manipulation of this number
by management that has led to the conservative policy of expensing R&D for financial reporting purposes But to make informed
decisions, managers need to estimate the future value from
investment in R&D in order to make intelligent investments
16-38 The gross margin on an income statement might be an
appropriate measure for assessing the success of a sales department Sales managers are generally responsible for the price charged for goods or services (and therefore the margin received for them) and the volume of sales Both of these factors are reflected in the gross profit (or gross margin) To separate the effects of volume and
profit margin, managers might look at the gross margin percentage
as a measure of margin and total sales revenues as a measure of
volume
Trang 1816-39 The statement of cash flows has three sections The section on investing activities generally shows how much cash the company used for expansion and replacement of facilities The cash flow from operations section shows how much cash was generated by the
company’s operating activities that might be available for the
needed investment If the cash flow from operations is insufficient to cover the investment needs, then the cash from financing activities section shows the sources that provided additional capital –
generally from issuing either debt or equity Or, in the case where operating cash flows are more than sufficient for the planned
investing activities, the financing activities might reflect
distributions of cash to holders of debt or equity interests in the
company
16-40 If the purchasing officer wishes to maximize her performance evaluation by reporting the largest possible gross margin, she will not buy the oil at $70 per barrel if the company uses LIFO Why? Because the $70 spent for the most recent purchase of oil becomes part of cost of goods sold under LIFO, replacing oil charges at $50 per barrel or less This would reduce the gross margin Under
FIFO, the purchase decision would not affect current year’s gross margin Therefore, the purchasing officer would not have any
special incentive to either purchase or avoid purchasing the oil
With an incentive not to purchase under LIFO and no particular incentive under FIFO, she is more likely to purchase the oil if the company uses FIFO than if it uses LIFO
Trang 1916-41 (10-15 min.) The purpose of this problem is to stress the
limitations of the use of historical costs, particularly where there are significant amounts of property, plant, and equipment € stands for the euro, the European measure of currency
The balance sheet values do not come close to the current
market value of the land and building, €1,800,000 ÷ 60, or
€3,000,000 Consequently, in terms of current values before
expansion and modernization, stockholders' equity is understated (in thousands):
Net book value:
Excess of market value over net book value €2,420
As conventionally prepared after the expansion and
modernization, the balance sheet would be (in thousands):
Accum depreciation 720
Total liabilities and
The balance sheet would be unusually deceiving The
mortgage would appear to be exceedingly high in relation to the book value of the assets The historical cost and resulting
stockholders' equity have little meaning
For more elaborate examples entailing both specific and
general price level effects, see Appendix 17
Trang 2016-42 (25-30 min.) This problem is similar to 16-A1, but it is more difficult because it includes items not shown in exhibits 16-1 and 16-
5 and terminology is varied slightly
HONSHU COMPANY Balance Sheet May 31, 20X1 (in millions) ASSETS:
Current assets:
Noncurrent assets:
Total noncurrent assets = Total assets - Total current assets
= ¥373,000 - ¥92,000
= ¥281,000 Long-term investments = Noncurrent assets - Fixed assets, net - Capital
construction fund – Intangible assets
= ¥281,000 - ¥217,000 - ¥28,000 - ¥21,000
= ¥15,000
Trang 21LIABILITIES AND STOCKHOLDERS' EQUITY:
Current liabilities:
Noncurrent liabilities:
Deferred income tax liability 12,000
Stockholders' equity:
Paid-in capital in excess of par 102,000
Total liabilities and stockholders' equity ¥373,000
Trang 22HONSHU COMPANY Income Statement For the Year Ended May 31, 20X1 (in millions except net income per share)
*¥11,000,000,000 ÷ 50,000 = ¥220,000
Trang 2316-43 (5 min.)
The split between cash and credit sales is irrelevant for purposes of this problem
Less increase in accounts receivable (9,000)
16-44 (5 min.)
Add increase in inventory ($120,000-$95,000) 25,000 Deduct increase in accounts payable ($51,000-$24,000) (27,000)
16-45 (5-10 min.)
Increase in accrued wages and salaries payable $ 50,000
Beginning balance, accrued wages, and salaries payable $ 15,000 Increase in accrued wages and salaries payable 50,000 Ending balance, accrued wages, and salaries payable $ 65,000
Trang 2416-47 (5-10 min.)
SANDMO AND ASSOCIATES Reconciliation of Net Income to Net Cash Provided by
Operating Activities For the Year Ended December 31, 20X0
Add depreciation, which was deducted in
computing net income but does not affect cash 50,000
Deduct increase in accounts receivable (19,000)
Net cash provided by operating activities NOK251,000
16-48 (10 min.)
GUILLEN COMPANY Reconciliation of Net Loss to Net Cash Provided by
Operating Activities For the Year Ended December 31, 20X2
Add increase in wages and salaries payable 5,000
Net cash provided by operating activities $ 6,000
Trang 2516-49 (15-25 min.)
WISCONSIN BOTTLERS Statement of Cash Flows For the Year Ended December 31, 20X1
(in thousands)
Cash flows from operating activities:
For income taxes (108)
Cash disbursed for operating activities (2,684) Net cash provided by operating activities 215
Cash flows from investing activities:
Purchase of warehouse $ (540)
Proceeds from sale of equipment 37
Net cash used in investing activities (503)
Cash flows from financing activities:
Net cash used in financing activities (86)
* $374 + $6
Trang 2616-50 (10-20 min.)
WISCONSIN BOTTLERS Supporting Schedule to Statement of Cash Flows Reconciliation of Net Income to Net Cash Provided by
Operating Activities For the Year Ended December 31, 20X1
(in thousands)
Adjustments to reconcile net income to net cash
provided by operating activities
Deduct: Increase in accounts receivable (3,003-2,899) (104)
Add: Increase in accounts payable (2,096+56-2,140) 12
Deduct: Decrease in salaries and wages payable (24)
Deduct: Decrease in income taxes payable (108-105) (3)
Net cash provided by operating activities $215
Trang 2716-51 (10 min.) [Note: In the first printing of the text the sales
number was incorrect Instead of $316 it should be $226.]
COEUR D’ALENE COMPANY
Reconciliation of net income to net cash
provided by operating activities:
2 An increase in depreciation does not affect net cash flow from
operating activities The $10 million increase in depreciation
decreases net income by $10 million and increases the addback
by $10 million The net effect is zero We add depreciation to net income merely to offset its deduction when computing net income, not because it provides cash