Solutions manual intermediate accounting 18e by stice and stice ch05

The statement, “Cash flow is equal to net income plus depreciation” is wrong cause it ignores the impact on cash from operating activities of all the changes in current operating assets

145

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

ex-penses, such as write-offs,

deprecia-tion, and provisions for future

obliga-tions Earnings may give an overly

pessimistic view of the firm

• A company is growing rapidly

Re-ported earnings may be positive, but

operations are actually consuming

ra-ther than generating cash

• A company badly needs to report

fa-vorable earnings, as is the case before

a major loan application or before a

stock offering In these cases, cash

flow from operations provides an

excel-lent reality check for reported earnings

2 To qualify as a cash equivalent when

pre-paring a statement of cash flows, an item

must be

(a) readily convertible to cash, and

(b) so near its maturity that there is

insig-nificant risk of changes in value due to

changes in interest rates

As a general rule, only investments with

original maturities of three months or less

qualify The original maturity is determined

from the date of acquisition of the

invest-ment by the entity, not the date of original

issuance of the security

3 Operating activities include those

transac-tions and events that enter into the

deter-mination of net income Cash receipts from

selling goods or from providing services are

the major cash inflow for most businesses

Major cash outflows include payments to

purchase inventory and to pay wages,

taxes, interest, utilities, rent, and similar

expenses

Investing activities are the purchase and

sale of land, buildings, and equipment and

the purchase and sale of financial

instru-ments 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 direct method reports all operating

cash receipts and cash payments The ference between cash receipts and pay- ments is the net cash flow from operations The indirect method begins with net income

dif-as reported on the income statement, justs for any noncash items (such as de- preciation), 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

ad-6 Many users favor the direct method

be-cause 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 already have to re- port net income, it is easier for them to start with that number and convert it to net cash flow from operations rather than use the di- rect method

7 When the direct method is used,

deprecia-tion expense is omitted from the calculadeprecia-tion

of cash from operating activities because it

is a noncash expense When the indirect method is used, depreciation expense is added back to net income because depre- ciation was subtracted in the original com- putation of net income

8 The statement, “Cash flow is equal to net

income plus depreciation” is wrong cause it ignores the impact on cash from operating activities of all the changes in current operating assets and current oper- ating liabilities

9 The FASB 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

ex-pense enters into the calculation of net

come The FASB considered classifying

in-terest payments as financing activities but

ultimately decided on the operating activity

classification

10 The “target number” is the net change in

the cash balance, as shown in the balance

sheet The sum of cash flows from

operat-ing, investoperat-ing, and financing activities

should equal the net change in cash

11 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

bal-ance for the year, are used to calculate the

amount of cash paid for inventory

pur-chases

12 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

be-cause the loss was subtracted in the

origi-nal computation of net income In both

cases, any effects of the sale of the

long-term asset are removed from the

computa-tion of operating cash flow; cash received

from the sale of long-term assets is

re-ported as an investing activity

13 The FASB has defined all transactions

involving available-for-sale and

held-to-maturity securities as investing activities

Transactions involving trading securities

are usually included in the Operating

Activi-ties section

14 If the direct method is used, a separate

schedule must be presented to reconcile

net income to net cash provided by (used

in) operating activities If a company elects

to use the indirect method, the amounts

paid during the period for interest and

in-come taxes should be disclosed

Regard-less of the method used for reporting

oper-ating cash flows, companies must disclose

any significant noncash investing and

fi-nancing transactions The supplemental

disclosures required by FASB ASC Topic

230 can be provided in the notes to the nancial statements or in separate sched- ules accompanying the statement of cash flows

fi-15 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 ported on the statement of cash flows itself

re-16 Under FASB ASC Topic 230, interest paid

is classified as an operating activity

17 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

18 When the value of a company’s cash flow

adequacy ratio is less than 1.0, that pany is not generating enough cash from operations to pay for all new plant and equipment purchases Accordingly, the company has no cash left over to repay loans or to distribute to investors

com-19 The income statement details the

transac-tions that occurred in temporary accounts that are summarized in the retained earn- ings account The statement of cash flows provides information relating to transactions that occurred in the cash account for the period

20 A forecasted statement of cash flows

al-lows management to see the relationship between forecasted operating cash flow and the cash needed for investing activi- ties If there is an expected shortfall in available cash, a company can either use the forecasted information in obtaining ad- ditional financing or the company can scale back its expansion plans in order to reduce the drain on cash

21 Lenders can use a forecasted statement of

cash flows to see whether it seems likely that a company can continue to meet its ex- isting debt obligations An investor can use the projected cash flow statement to evalu- ate the likelihood that a company will be able to continue making dividend pay- ments

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 $7,250 because time to maturity at date of purchase was less

than three months

(c) Cash of $3,400

(d) Not cash equivalent because time to maturity at date of purchase was greater

than three months

$7,250 + $3,400 = $10,650

PRACTICE 5–2 THREE CATEGORIES OF CASH FLOWS

(d) Cash collected from customers $13,400

(b) Cash paid for interest (600)

(f) Cash paid for income taxes (1,850)

Total $10,950

Investing

(a) Cash received from sale of a building $ 4,200

Financing

(c) Cash paid to repurchase shares of stock (treasury stock) $ (1,100)

(e) Cash paid for dividends (930)

Total $ (2,030)

PRACTICE 5–3 CASH FLOW PATTERNS

Company A steady state

Company B start-up, high growth

Company C cash cow

PRACTICE 5–4 NONCASH INVESTING AND FINANCING ACTIVITIES

PRACTICE 5–5 GENERAL FORMAT FOR A STATEMENT OF CASH FLOWS

Cash flow from operating activities $ 6,200

Cash flow from investing activities (9,400)

Cash flow from financing activities 5,000

Net decrease in cash $ 1,800

Cash balance, beginning of year 2,800

Cash balance, end of year $ 4,600

PRACTICE 5–6 CASH COLLECTED FROM CUSTOMERS

Accounts receivable, beginning $ 1,400

Plus: Sales 10,000

Cash available for collection $11,400

Less: Accounts receivable, ending (1,375)

Cash collected from customers $10,025

PRACTICE 5–7 CASH PAID FOR INVENTORY PURCHASES

Inventory, ending $ 2,100

Plus: Cost of goods sold 5,300

Required inventory $ 7,400

Less: Beginning inventory (2,500)

Inventory purchased this year $ 4,900

Accounts payable, beginning $ 1,350

Plus: Inventory purchased this year 4,900

Accounts to be paid $ 6,250

Less: Accounts payable, ending (1,200)

Cash paid for inventory purchases $ 5,050

PRACTICE 5–8 CASH PAID FOR OPERATING EXPENSES

Prepaid operating expenses, ending $ 700

Plus: Operating expenses 3,800 Required cash outlay for operating expenses $ 4,500 Less: Prepaid operating expenses, beginning (1,000) Cash paid for operating expenses this year $ 3,500 PRACTICE 5–9 DIRECT METHOD Income Statement Adjustments Statement of Cash Flows Sales $ 7,800 + 320 $ 8,120 Cost of goods sold (3,100) + 180 – 210 (3,130) Interest expense (450) + 80 (370) Depreciation expense (600) + 600 0

Net income $ 3,650 $ 4,620 Direct Method: Cash collected from customers $ 8,120 Cash paid for inventory purchases (3,130) Cash paid for interest (370)

Net cash flow from operating activities $ 4,620 PRACTICE 5–10 INDIRECT METHOD Income Statement Adjustments Statement of Cash Flows Sales $ 7,800 + 320 $ 8,120 Cost of goods sold (3,100) + 180 – 210 (3,130) Interest expense (450) + 80 (370) Depreciation expense (600) + 600 0 Net income $ 3,650 $ 4,620 Indirect Method: Net income $3,650 Plus: Depreciation 600

Plus: Decrease in accounts receivable 320

Plus: Decrease in inventory 180

Less: Decrease in accounts payable (210)

Plus: Increase in interest payable 80

Net cash flow from operating activities $4,620

PRACTICE 5–11 COMPLETE STATEMENT OF CASH FLOWS FROM DETAILED

DATA Operating activities:

(f) Cash collected from customers $11,200 (b) Cash paid to purchase inventory (7,800)

(d) Cash paid for interest (450)

(j) Cash paid for income taxes (1,320) Net cash flow from operating activities $ 1,630 Investing activities: (c) Cash received from sale of a building $ 4,750 (k) Cash paid to purchase machinery (1,950) Net cash flow from investing activities $ 2,800 Financing activities: (e) Cash paid to repay a loan $ (1,000) (h) Cash received from issuance of new shares of common stock 1,200 (i) Cash paid for dividends (780)

Net cash flow from financing activities $ (580)

Net increase in cash $ 3,850 Cash balance, beginning of year 1,500 Cash balance, end of year $ 5,350 PRACTICE 5–12 OPERATING CASH FLOW: GAINS AND LOSSES Net income $ 250

Plus: Depreciation 1,000 Less: Gain on sale of equipment (440)

Plus: Loss on sale of building 210

Less: Increase in accounts receivable (300)

Less: Decrease in income taxes payable (170)

Net cash flow from operating activities $ 550

PRACTICE 5–13 OPERATING CASH FLOW: RESTRUCTURING CHARGES Net income $ 500

Plus: Depreciation 1,000 Plus: Restructuring charge 2,300 Plus: Decrease in inventory 300

Plus: Increase in wages payable 170

Net cash flow from operating activities $4,270

PRACTICE 5–14 OPERATING CASH FLOW: DEFERRED INCOME TAXES

Reported income tax expense $35,500 Less: Increase in deferred tax liability (3,500) Taxes owed for current year operations $32,000 Less: Increase in income taxes payable (390) Cash paid for income taxes $31,610

PRACTICE 5–15 OPERATING CASH FLOW: DEFERRED, OR UNEARNED, SALES

REVENUE 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:

Prepaid insurance, ending $ 1,500 Plus: Insurance expense 7,500 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:

Wages payable, beginning $ 750 Plus: Wage expense this year 14,600 Wages to be paid $15,350 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 PPE, beginning $124,000

Less: PPE sold during the year 28,000

Ending PPE without purchase of new PPE $ 96,000

PPE, ending $134,000

Less: Ending PPE without purchase of new PPE 96,000

Cash paid to purchase new PPE $ 38,000

This assumes that all PPE purchases were for cash

PRACTICE 5–18 COMPUTING CASH RECEIVED FROM THE SALE OF PROPERTY,

PLANT, AND EQUIPMENT Accumulated depreciation, beginning $ 41,000

Plus: Depreciation expense 9,700

Ending accumulated depreciation without PPE sale $ 50,700

Less: Actual ending accumulated depreciation 32,000

Accumulated depreciation associated with PPE sold $ 18,700

Original cost of PPE sold $ 28,000

Accumulated depreciation associated with PPE sold 18,700

Book value of PPE sold $ 9,300

Book value of PPE sold $ 9,300

Plus: Gain on sale of PPE 6,500

Cash received from sale of PPE $ 15,800

PRACTICE 5–19 COMPUTING CASH PAID FOR DIVIDENDS

Retained earnings, beginning $106,000

Plus: Net income 10,000

Ending retained earnings without dividend declarations $116,000

Less: Actual ending retained earnings 112,000

Dividends declared during the year $ 4,000

Dividends declared during the year $ 4,000

Plus: Decrease in dividends payable 250

Cash paid for dividends this year $ 4,250

PRACTICE 5–20 COMPUTING CASH FLOW RATIOS

1 Cash-flow-to-net-income

Cash flow from operating activities $ 21,000

Net income ÷ $18,000

Cash-flow-to-net-income ratio 1.17

2 Cash flow adequacy

Cash paid for capital expenditures $ 23,500

Cash paid for acquisitions 11,000

Cash required for investing activities $ 34,500

Cash flow from operating activities $ 21,000

Cash required for investing activities ÷ $34,500

Cash flow adequacy ratio 0.61

3 Cash times interest earned

Cash flow from operating activities $ 21,000

Cash paid for interest 3,800

Cash paid for income taxes 6,700

Operating cash flow before interest and taxes $ 31,500

Cash paid for interest ÷ $3,800

Cash times interest earned ratio 8.29

PRACTICE 5–21 ARTICULATION

a Cash increased by $10,500 during the year ($22,500 – $12,000)

Cash from operating activities $ ?

Cash from investing activities (25,000)

Cash from financing activities (8,000)

Increase in cash $ 10,500

Cash from operating activities = $43,500

b At the beginning of the year: Assets = Liabilities + Owners’ equity

PRACTICE 5–22 PREPARING A FORECASTED STATEMENT OF CASH FLOWS

Operating activities:

Net income $ 2,275

Plus: Depreciation 1,200

Less: Increase in accounts receivable (180)

Less: Increase in inventory (390)

Plus: Increase in accounts payable 150

Net cash flow from operating activities $ 3,055 Investing activities: Cash paid for PPE purchases ($1,300 PPE increase + $1,200 depreciation replacement) (2,500) Financing activities: New long-term debt $ 1,000 New paid-in capital 400

Cash paid for dividends ($1,500 + $2,275 − $1,850 = $1,925) (1,925) Net cash flow from financing activities (525)

Net increase in cash $ 30

Cash, beginning 100

Cash, ending $ 130

(o) Noncash transaction; report separately

(p) Noncash item; ignore under direct method; add back to net income der 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 $60,000 should be reported as a use of cash from investing activities The balance ($150,000) 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:

Purchase inventory $16,700

Purchase furniture and fixtures 8,400 Purchase land and buildings 20,100 Purchase goodwill 9,000 $54,200 Note that the entire amount of the business purchase is reported as a cash outflow from investing activities even though some of the assets ($16,700

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 ducted in computing net cash flow provided by (used in) operations Cash payments for purchases includes payment for purchases of the previous period

de-5–25 (a) $15,500 of cash used to purchase equipment; $16,000 of cash provided

from sale of equipment Both are investing activities (Note: The $2,000

loss on sale would be added to net income when using the indirect thod.)

me-Equipment Beginning balance 62,000 Sale of equipment 21,000 Purchase of equipment 15,500

Ending balance 56,500

(b) No cash is provided or used by depreciation; however, $4,100 is added

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

by operations when using the indirect method

Accumulated Depreciation Sale of equipment 3,000 Beginning balance 12,800

(c) $5,000 ($25,000 – $20,000) of cash used to pay off a portion of long-term

debt, a financing activity

(d) $4,000 ($16,000 – $12,000) of cash provided from issuance of common

stock, a financing activity

5–26

Statement of Cash Flows

(a) Operating activities:

Cash paid for inventory $195,990

Cash paid for other expenses 24,300 255,340

Net cash provided by operating activities $ 19,760

Increase in salaries payable 150

Increase in accounts receivable (3,600)

Decrease in accounts payable (750) 14,260

Net cash provided by operating activities $19,760

5–27

Statement of Cash Flows

(a) Operating activities:

Cash paid for other expenses 97,600 (524,100)

Net cash provided by operating activities $ 146,300

(b) Operating activities:

Adjustments:

Increase in accounts payable 1,300

Increase in income taxes payable 1,800

Increase in accounts receivable (5,000)

Decrease in interest payable (400) 44,000

Net cash provided by operating activities $146,300

5–28

Statement of Cash Flows For the Year Ended December 31, 2013 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 7,400 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

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

Cash flows from operating activities:

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 1,050 900 Net cash provided by operating activities $36,400

5–30

Income Statement Adjustments Cash Flows

Sales $ 7,200,000 $(420,000) $ 6,780,000 Increase in

receiv-ables Cost of goods

36,000

(2,764,000)

Increase in accrued expenses related to manufacturing Selling, general,

and

administra-tive expenses

expenses related to selling

selling expense (2,300,000)

280,000

(2,023,000)

Amount of tion related to selling Income taxes (500,000) 54,000 (446,000) Increase in taxes

deprecia-payable Net income $ 900,000 $ 1,547,000 Cash from operating

activities

5–31

Cash flows from operating activities:

Net income $ 75,000 Adjustments:

Depreciation $50,000

Amortization 20,000

Decrease in accounts receivable 7,000 Increase in inventory (5,000) Increase in accounts payable 4,500 Decrease in interest payable (800) 75,700 Net cash provided by operating activities $150,700

5–32

Cash flows from operating activities:

Cash receipts from customers $457,000 (a) Cash payments for:

Inventory $275,500 (b)

Operating expenses 24,800 (c)

Interest 6,000 (d) 306,300 Net cash provided by operating activities $150,700 COMPUTATIONS:

+ Beginning interest payable 1,200 – Ending interest payable (400) = Cash paid for interest $ 6,000

5–33

1 Cash collected from accounts receivable:

Accounts receivable, beginning balance $ 372,000 Sales in 2013 3,946,000

Total collectible accounts $ 4,318,000

Less: Accounts receivable, ending balance 409,000

Cash collected in 2013 $ 3,909,000

2 Cash paid on accounts payable:

Inventory, ending balance $ 289,000

Add: Cost of goods sold in 2013 2,385,000 Total goods available in 2013 $ 2,674,000 Less: Inventory, beginning balance 304,000 Inventory purchases in 2013 $ 2,370,000

Accounts payable, beginning balance $ 174,000

Add: Inventory purchases in 2013 2,370,000 Total accounts to be paid in 2013 $ 2,544,000 Less: Accounts payable, ending balance 191,000

Total cash paid on accounts payable in 2013 $ 2,353,000

3 Cash dividend payment:

Retained earnings, beginning balance $ 211,000 Add: Net income, 2013 769,000

Less: Retained earnings, ending balance 525,000

Total dividends declared $ 455,000

Less: Increase in dividends payable 65,000 Total cash dividend payment in 2013 $ 390,000

4 Cash receipts not provided by operations:

Cash provided from financing:

Notes payable* ($210,000 – $106,000) $ 104,000 Common stock ($625,000 – $600,000) 25,000 Cash receipts not provided by operations $ 129,000

5 Cash payments for assets not reflected in operations:

Available-for-sale securities $ 400,000

Property, plant, and equipment* ($656,000 – $541,000) 115,000 Cash payments for assets not reflected in operations $ 515,000

*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

5–34

Goulding Manufacturing Company Statement of Cash Flows (Indirect method) For the Year Ended December 31, 2013 Cash flows from operating activities:

Net income $ 450,700 Adjustments:

Depreciation expense $ 70,000 Intangible assets amortization 10,000 Increase in accounts receivable (19,000) Increase in inventory (18,000) Decrease in accounts payable (23,400) Increase in interest payable 5,900 Increase in wages payable 9,500 35,000 Net cash provided by operating activities $ 485,700 Cash flows from investing activities:

Purchase of machinery $ (62,000)

Net cash used in investing activities (62,000) Cash flows from financing activities:

Retirement of long-term debt $(500,000)

Sale of common stock 160,000

Payment of dividends (22,000)

Net cash used in financing activities (362,000) Net increase in cash and cash equivalents $ 61,700 Cash and cash equivalents at beginning of year 130,000 Cash and cash equivalents at end of year $ 191,700 5–35

1 Dec 31 Accounts receivable = Jan 1 Accounts receivable + Sales on

account – Cash collections Dec 31 Accounts receivable = $75,000 + $540,000 – $551,000 Dec 31 Accounts receivable = $64,000

2 Dec 31 Accounts payable = Jan 1 Accounts payable + Inventory

pur-chased on account – Cash paid for inventory

$56,000 = $44,000 + $279,000 – Cash paid for inventory Cash paid for inventory = $267,000

3 Dec 31 Inventory = Jan 1 Inventory + Inventory purchased on account

– Cost of goods sold

$72,000 = $83,000 + $279,000 – Cost of goods sold Cost of goods sold = $290,000

5–36

1 Dec 31 Retained earnings = Jan 1 Retained earnings + Net income – Dividends

$665,000 = $543,000 + Net income – $47,000

Net income = $169,000

2 Dec 31 Cash = Jan 1 Cash + Cash from operating activities + Cash from

invest-ing activities + Cash from financinvest-ing activities

$141,000 = $97,000 + Cash from operating activities – $483,000 – $287,000

Cash from operating activities = $814,000

5–37

2013 2012

(Cash from operations ÷ Net income)

(Cash from operations ÷ Cash paid for purchase of fixed assets)

[(Cash from operations + Cash paid for interest and taxes) ÷

Cash paid for interest]

Cost of goods sold 1,200 1,440 40% of sales,

same as last year

Depreciation expense 100 140 20% of PP&E,

Other operating expenses 1,440 1,728 48% of sales,

same as last year

same as last year Income before taxes $ 210 $ 252

same as last year

5–38 (Concluded)

2

Cash flows from operating activities:

Net income $ 151

Adjustments: Depreciation $ 140

Increase in other current assets (90)

Increase in accounts payable 38 88

Net cash provided by operating activities $ 239

Cash flows from investing activities: Purchase of property, plant, and equipment $(340) (a) Net cash used in investing activities (340)

Cash flows from financing activities: Repayment of bank loans payable $(100) (b) Issuance of common stock 209 (c) Net cash provided by financing activities 109

Net increase in cash and cash equivalents $ 8

Cash and cash equivalents at beginning of year 40

Cash and cash equivalents at end of year $ 48

COMPUTATIONS: (a) Beginning property, plant, and equipment $500

Less: Depreciation expense 140

$360

Ending property, plant, and equipment 700

Difference (assets purchased) $340

(b) Beginning bank loans payable $500

Ending bank loans payable 400

Decrease (bank loans repaid) $100

(c) Beginning stockholders’ equity $300

Plus: Increase from forecasted net income 151

Less: Decrease from forecasted cash dividends (0)

Total stockholders’ equity with no new stock $451

Ending stockholders’ equity 660

Increase (common stock issued) $209

5–39

1

Property, plant, and equipment, net 800 800 more efficient, item (b)

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

Income Statement 2013 Forecasted

same as last year

Other operating expenses 80 120 8% of sales,

same as last year

same as last year

same as last year

5–39 (Concluded)

3

Cash flows from operating activities:

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 Cash flows from investing activities:

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

Net cash used in investing activities (40) Cash flows from financing activities:

New bank loans payable $ 200 (b)

Repurchase of common stock (203) (c)

Payment of cash dividends (0)

Net cash used 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

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)

PROBLEMS

5–40

Income Statement Adjustments

Statement of Cash Flows

Income tax expense (85,500) + 1,750 (83,750)

Loss on sale of equipment (9,500) + 9,500 0

Net income $ 151,750 $ 137,350

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 salaries 111,000

Cash paid for interest 12,700

Cash paid for income taxes 83,750 1,385,650

Net cash provided by operating activities $ 137,350

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 3,300

Increase in income taxes payable 1,750 38,200

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 $ 137,350

5–41

Tanzanite Imporium Statement of Cash Flows (Indirect Method) For the Year Ended December 31, 2013 Cash flows from operating activities:

Net income $ 92,200 Adjustments:

Depreciation $ 21,500

Increase in accounts receivable (7,000)

Decrease in inventory 35,300

Decrease in supplier short-term notes payable (30,000)

Increase in accounts payable 12,000 31,800 Net cash provided by operating activities $ 124,000 Cash flows from investing activities:

*An additional $20,000 of equipment was purchased with a long-term note