Intermediate accounting 14e chapter 23 solution manual

Examples of sources of cash in a statement of cash flows include cash from operating activities, issuance of debt, issuance of capital stock, sale of investments, and the sale of propert

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CHAPTER 23

Statement of Cash Flows

ASSIGNMENT CLASSIFICATION TABLE (BY TOPIC)

Topics Questions

Brief Exercises Exercises Problems

Concepts for Analysis

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ASSIGNMENT CLASSIFICATION TABLE (BY LEARNING OBJECTIVE)

Learning Objectives

Brief Exercises Exercises Problems

1 Describe the purpose of the statement

of cash flows.

2 Identify the major classifications

of cash flows.

3 Differentiate between net income and net

cash flows from operating activities.

4, 5, 9, 10, 11 2, 3, 4, 5, 6,

7, 8, 16

6, 7

4 Contrast the direct and indirect methods

of calculating net cash flow from operating

activities.

4, 5, 6, 7, 9 3, 4, 5,

6, 7, 8

6, 7

5 Determine net cash flows from investing

and financing activities.

7 Identify sources of information

for a statement of cash flows.

1, 2, 4,

5, 8, 9

8 Discuss special problems in preparing

a statement of cash flows.

6, 7, 8, 9

9 Explain the use of a worksheet in

preparing a statement of cash flows.

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ASSIGNMENT CHARACTERISTICS TABLE

Item Description

Level of Difficulty

Time (minutes)

E23-2 Statement presentation of transactions—indirect method Moderate 20–30 E23-3 Preparation of operating activities section—indirect method,

periodic inventory.

Simple 15–25 E23-4 Preparation of operating activities section—direct method Simple 20–30 E23-5 Preparation of operating activities section—direct method Simple 20–30 E23-6 Preparation of operating activities section—indirect method Simple 15–20 E23-7 Computation of operating activities—direct method Simple 15–20 E23-8 Schedule of net cash flow from operating activities—

indirect method.

Moderate 20–30

E23-10 Classification of transactions Moderate 25–35

E23-16 Cash provided by operating, investing, and financing

activities.

Moderate 30–40 E23-17 SCF—indirect method and balance sheet Moderate 30–40

E23-19 Worksheet analysis of selected accounts Moderate 20–25 E23-20 Worksheet analysis of selected transactions Moderate 20–25

P23-6 SCF—indirect method, and net cash flow from operating

activities, direct method.

Moderate 40–50

P23-7 SCF—direct and indirect methods from comparative

financial statements.

Moderate 30–40 P23-8 SCF—direct and indirect methods Moderate 30–40

CA23-2 SCF theory and analysis of improper SCF Moderate 30–35 CA23-3 SCF theory and analysis of transactions Moderate 30–35 CA23-4 Analysis of transactions’ effect on SCF Moderate 20–30

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SOLUTIONS TO CODIFICATION EXERCISES

CE23-1

Master Glossary

(a) Cash equivalents are short-term, highly liquid investments that have both of the following

characteristics:

1 Readily convertible to known amounts of cash

2 So near their maturity that they present insignificant risk of changes in value because of changes in interest rates.

Generally, only investments with original maturities of three months or less qualify under that definition Original maturity means original maturity to the entity holding the investment For example, both a three-month U.S Treasury bill and a three-year Treasury note purchased three months from maturity qualify as cash equivalents However, a Treasury note purchased three years ago does not become a cash equivalent when its remaining maturity is three months Examples of items commonly considered to be cash equivalents are Treasury bills, commercial paper, money market funds, and federal funds sold (for an entity with banking operations).

(b) Financing activities include obtaining resources from owners and providing them with a return

on, and a return of, their investment; receiving restricted resources that by donor stipulation must

be used for long-term purposes; borrowing money and repaying amounts borrowed, or otherwise settling the obligation; and obtaining and paying for other resources obtained from creditors on long-term credit.

(c) Investing activities include making and collecting loans and acquiring and disposing of debt or

equity instruments and property, plant, and equipment and other productive assets, that is, assets held for or used in the production of goods or services by the entity (other than materials that are part of the entity’s inventory) Investing activities exclude acquiring and disposing of certain loans or other debt or equity instruments that are acquired specifically for resale, as discussed in paragraphs 230-10-45-12 and 230-10-45-21.

(d) Operating activities include all transactions and other events that are not defined as investing or

financing activities (see paragraphs 230-10-45-12 through 45-15) Operating activities generally involve producing and delivering goods and providing services Cash flows from operating activities are generally the cash effects of transactions and other events that enter into the determination of net income.

CE23-2

According to FASB ASC 230-10-45-14 (Statement of Cash Flow—Other Presentation Matters—Cash Flows from Financing Activities):

All of the following are cash inflows from financing activities:

(a) Proceeds from issuing equity instruments.

(b) Proceeds from issuing bonds, mortgages, notes, and from other short- or long-term borrowing.

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CE23-2 (Continued)

(c) Receipts from contributions and investment income that by donor stipulation are restricted for the purposes of acquiring, constructing, or improving property, plant, equipment, or other long-lived assets or establishing or increasing a permanent endowment or term endowment.

(d) Proceeds received from derivative instruments that include financing elements at inception, whether the proceeds were received at inception or over the term of the derivative instrument, other than a financing element inherently included in an at-the-market derivative instrument with

no prepayments.

(e) Cash retained as a result of the tax deductibility of increases in the value of equity instruments issued under share-based payment arrangements that are not included in the cost of goods or services that is recognizable for financial reporting purposes For this purpose, excess tax benefits shall be determined on an individual award (or portion thereof) basis.

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ANSWERS TO QUESTIONS

1 The main purpose of the statement of cash flows is to show the change in cash of a company from

one period to the next The statement of cash flows provides information about a company’s operating, financing, and investing activities More precisely, it provides information about the company’s cash inflows and outflows for the period.

2 Some uses of this statement are:

Assessing future cash flows: Income data when augmented with current cash flow data provide a

better basis for assessing future cash flows.

Assessing quality of income: Some believe that cash flow information is more reliable than

income information because income involves a number of assumptions, estimates and valuations.

Assessing operating capability: Whether an enterprise is able to maintain its operating capability,

provide for future growth, and distribute dividends to the owners depends on whether adequate cash is being or will be generated.

Assessing financial flexibility and liquidity: Cash flow data indicate whether a company should

be able to survive adverse operating problems and whether a company might have difficulty in meeting obligations as they become due, paying dividends, or meeting other recurring costs.

Providing information on financing and investing activities: Cash flows are classified by their

effect on balance sheet items; investing activities affect assets while financing activities affect liabilities and stockholders’ equity.

3 Investing activities generally involve noncurrent assets and include (1) lending money and

collecting on those loans and (2) acquiring and disposing of investments and productive long-lived

assets Financing activities, on the other hand, involve liability and owners’ equity items and

include (1) obtaining cash from creditors and repaying the amounts borrowed and (2) obtaining

capital from owners and providing them with a return on their investment Operating activities

include all transactions and events that are not investing and financing activities Operating activities involve the cash effects of transactions that enter into the determination of net income.

4 Examples of sources of cash in a statement of cash flows include cash from operating activities,

issuance of debt, issuance of capital stock, sale of investments, and the sale of property, plant,

and equipment Examples of uses of cash include cash used in operating activities, payment of

cash dividends, redemption of debt, purchase of investments, redemption of capital stock, and the purchase of property, plant, and equipment.

5 Preparing the statement of cash flows involves three major steps:

(1) Determine the change in cash This is simply the difference between the beginning and ending cash balances.

(2) Determine the net cash flow from operating activities This involves analyzing the current year’s income statement, comparative balance sheets and selected transaction data.

(3) Determine cash flows from investing and financing activities All other changes in balance sheet accounts are analyzed to determine their effect on cash.

6 Purchase of land—investing;

Payment of dividends—financing;

Cash sales—operating;

Purchase of treasury stock—financing.

7 Comparative balance sheets, a current income statement, and certain transaction data all provide

information necessary for preparation of the statement of cash flows Comparative balance sheets indicate how assets, liabilities, and equities have changed during the period A current income statement provides information about the amount of cash provided from operating activities Certain transactions provide additional detailed information needed to determine whether cash was provided

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Questions Chapter 23 (Continued)

8 It is necessary to convert accrual-based net income to a cash basis because net income includes

items that do not provide or use cash An example would be an increase in accounts receivable.

If accounts receivable increased during the period, revenues reported on the accrual basis would

be higher than the actual cash revenues received Thus, accrual basis net income must be adjusted

to reflect the net cash flow from operating activities.

9 Net cash flow from operating activities under the direct method is the difference between cash

revenues and cash expenses The direct method adjusts the revenues and expenses directly to reflect the cash basis This results in cash net income, which is equal to “net cash flow from operating activities.”

The indirect method involves adjusting accrual net income This is done by starting with accrual

net income and adding or subtracting noncash items included in net income Examples of ments include depreciation and other noncash expenses and changes in the balances of current asset and current liability accounts from one period to the next.

adjust-10 Net cash flow from operating activities is $3,820,000 Using the indirect method, the solution is:

Net income $3,500,000 Adjustments to reconcile net income to net cash

provided by operating activities:

Depreciation expense $ 520,000

Accounts receivable increase (500,000)

Accounts payable increase 300,000 320,000 Net cash provided by operating activities $3,820,000

11 Accrual basis sales $100,000

Less: Increase in accounts receivable 30,000

70,000 Less: Write-off of accounts receivable 2,000

Cash sales $ 68,000

12 A number of factors could have caused an increase in cash despite the net loss These are: (1) high

cash revenues relative to low cash expenses, (2) sales of property, plant, and equipment, (3) sales

of investments, and (4) issuance of debt or capital stock.

13 Declared dividends $260,000

Add: Dividends payable (beginning of year) 85,000

345,000 Deduct: Dividends payable (end of year) 90,000

Cash paid in dividends during the year $255,000

14 To determine cash payments to suppliers, it is first necessary to find purchases for the year To

find purchases, cost of goods sold is adjusted for the change in inventory (increased when inventory increases or decreased when inventory decreases) After purchases are computed, cash payments to suppliers are determined by adjusting purchases for the change in accounts payable.

An increase (decrease) in accounts payable is deducted from (added to) purchases to determine cash payments to suppliers.

15 Cash flows from operating activities

Net income $320,000 Adjustments to reconcile net income to net cash

Depreciation expense $124,000 Amortization of patent 40,000 Loss on sale of plant assets 21,000 185,000 Net cash provided by operating activities $505,000

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16 (a) Cash flows from operating activities

Net income XXXX Adjustments to reconcile net income to net

cash provided by operating activities:

Loss on sale of plant assets [($18,000 ÷ 10) x 3 1 /2 ] – $4,000 $ 2,300 Cash flows from investing activities

Sale of plant assets $ 4,000 (b) Cash flows from financing activities

Issuance of common stock $410,000 (c) No effect on cash; not shown in the statement of cash flows or in any related schedules

Depreciation expense $22,000 Gain on sale of available-for-sale securities (9,000) Cash flows from investing activities

Sale of available-for-sale securities $ 38,000

17 (a) Operating activity (g) Operating activity.

(b) Financing activity (h) Financing activity.

(c) Investing activity (i) Significant noncash investing

(d) Operating activity and financing activities.

(e) Significant noncash investing (j) Financing activity.

and financing activities (k) Investing activity.

(f) Financing activity (l) Operating activity.

18 Examples of noncash transactions are: (1) issuance of stock for noncash assets, (2) issuance of stock

to liquidate debt, (3) issuance of bonds or notes for noncash assets, and (4) noncash exchanges of property, plant, and equipment.

19 Cash flows from operating activities

Net income XXXX Adjustments to reconcile net income to net cash

Gain on redemption of bonds payable $ (120,000) Cash flows from financing activities

Redemption of bonds payable $(1,880,000)

20 Arguments for the indirect or reconciliation method are:

(a) By providing a reconciliation between net income and cash provided by operations, the differences are highlighted.

(b) The direct method is nothing more than a cash basis income statement which will confuse and create uncertainty for financial statement users who are familiar with the accrual-based income statements.

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(c) There is some question as to whether the direct method is cost/benefit-justified as this method would probably lead to additional preparation cost because the financial records are not maintained on a cash basis.

21 A worksheet is desirable because it allows the orderly accumulation and classification of data that

will appear on the statement of cash flows It is an optional but efficient device that aids in the preparation of the statement of cash flows.

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SOLUTIONS TO BRIEF EXERCISES

BRIEF EXERCISE 23-1

Cash flow from investing activities

Sale of land $ 180,000 Purchase of equipment (415,000) Purchase of available-for-sale securities (59,000) Net cash used by investing activities $(294,000)

Cash flow from financing activities

Issuance of common stock $ 250,000 Issuance of bonds payable 510,000 Payment of dividends (350,000) Purchase of treasury stock (46,000) Net cash provided by financing activities $ 364,000

Cash flows from operating activities

Cash received from customers

($200,000 – $12,000) $188,000 Cash payments:

To suppliers

($120,000 + $11,000 – $13,000) $118,000

For operating expenses

($50,000 – $21,000) 29,000 147,000

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Net income $30,000 Adjustments to reconcile net income

to net cash provided by operating

activities:

Depreciation expense $21,000

Increase in accounts payable 13,000

Increase in accounts receivable (12,000)

Increase in inventory (11,000) 11,000 Net cash provided by operating activities $41,000

Sales $420,000 Add: Decrease in accounts receivable

($72,000 – $54,000) 18,000 Cash receipts from customers $438,000

Cost of goods sold $500,000 Add: Increase in inventory ($113,000 – $95,000) 18,000 Purchases 518,000 Deduct: Increase in accounts payable

($69,000 – $61,000) 8,000 Cash payments to suppliers $510,000

Net cash provided by operating activities $531,000 Net cash used by investing activities (963,000) Net cash provided by financing activities 585,000 Net increase in cash 153,000 Cash, 1/1/12 333,000 Cash, 12/31/12 $486,000

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(a) Cash flows from operating activities

Cash received from customers $90,000 Cash paid for expenses ($60,000 – $1,840) 58,160

Net cash provided by operating activities $31,840

(b) Cash flows from operating activities

Net income $40,000 Increase in net accounts receivable

provided by operating activities

Depreciation expense 17,000 )

Increase in accounts payable 12,300 )

Increase in inventory (7,400) 10,900 Net cash provided by operating activities $60,900

Cash flows from operating activities:

Net loss ($70,000) Adjustments to reconcile net income (loss)

to net cash provided by operating activities

Depreciation expense 81,000 )

Increase in accounts receivable (8,100) 72,900 Net cash provided by operating activities $ 2,900

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(a) Land 40,000

Common Stock 10,000 Paid-in Capital in Excess of Par—

Common Stock 30,000 (b) No effect

(c) Noncash investing and financing activities:

Purchase of land through issuance of common stock $40,000

*$10,000 – ($40,000 – $32,000)

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(d) Operating—add to net income.

(e) Significant noncash investing and financing activity.

The loss on sale of plant assets is reported in the operating activities section of the statement of cash flows It is added to net income to arrive at net cash provided by operating activities.

The sale proceeds of $5,300 are reported in the investing activities section of the statement of cash flows as follows:

Sale of plant assets $ 5,300

(b) Shown in the financing activities section of a statement of cash

flows as follows:

Sale of common stock $330,000

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EXERCISE 23-2 (Continued)

(c) The write-off of the uncollectible accounts receivable of $27,000 is not

reported on the statement of cash flows The write-off reduces the Allowance for Doubtful Accounts balance and the Accounts Receivable balance It does not affect cash flows.

Note to instructor: The change in net accounts receivable is times used to compute an adjustment to net income under the indirect method.

some-(d) The net loss of $50,000 should be reported in the operating activities

section of the statement of cash flows Depreciation of $22,000 is reported in the operating activities section of the statement of cash flows The gain on sale of land also appears in the operating activities section of the statement of cash flows The proceeds from the sale of land of $39,000 are reported in the investing activities section of the statement of cash flows These four items might be reported as follows:

Net loss $(50,000) Adjustments to reconcile net income

to net cash used in operating activities*:

Depreciation 22,000 Gain on sale of land (9,000)

*Either net cash used or provided depending upon other adjustments Given only the adjustments in (d), the “net cash used” should be employed.

Cash flows from investing activities

Sale of land $39,000

(e) The purchase of the U.S Treasury bill is not reported in the statement

of cash flows This instrument is considered a cash equivalent and therefore cash and cash equivalents have not changed as a result of this transaction.

(f) Patent amortization of $20,000 is reported in the operating activities

section of the statement of cash flows It is added to net income in arriving at net cash provided by operating activities.

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(g) The exchange of common stock for an investment in Plumlee is

reported as a “noncash investing and financing activity.” It is shown

as follows:

Noncash investing and financing activities

Purchase of investment by issuance

of common stock $900,000

(h) The purchase of treasury stock is reported as a cash payment in the

financing activities section of the statement of cash flows.

EXERCISE 23-3 (15–25 minutes)

RODRIQUEZ COMPANY Partial Statement of Cash Flows For the Year Ended December 31, 2012 Cash flows from operating activities

Net income $1,050,000 Adjustments to reconcile net income

to net cash provided by operating activities:

Depreciation expense $ 60,000

Decrease in accounts receivable 310,000

Decrease in inventory 300,000

Increase in prepaid expenses (170,000)

Decrease in accounts payable (275,000)

Decrease in accrued expenses payable (120,000) 105,000 Net cash provided by operating activities $1,155,000

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RODRIQUEZ COMPANY Partial Statement of Cash Flows For the Year Ended December 31, 2012 Cash flows from operating activities

Cash receipts from customers $7,210,000 (a) Cash payments:

receivable 310,000 Cash receipts from customers $7,210,000

(b) Cash payments to suppliers

Cost of goods sold $4,700,000 Deduct: Decrease in inventories 300,000 Purchases 4,400,000 Add: Decrease in accounts

payable 275,000 Cash payments to suppliers $4,675,000

(c) Cash payments for operating

expenses

Operating expenses, exclusive

of depreciation $1,090,000* Add: Increase in prepaid

expenses $170,000

Add: Decrease in accrued

Add: expenses payable 120,000 290,000 Cash payments for operating

expenses $1,380,000

*$450,000 + ($700,000 – $60,000)

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NORMAN COMPANY Partial Statement of Cash Flows For the Year Ended December 31, 2012 Cash flows from operating activities

Cash receipts from customers $862,000 (a) Cash payments:

For operating expenses $609,000 (b) For income taxes 44,500 (c) 653,500 Net cash provided by operating

Cash receipts from customers $862,000

(b) Computation of cash payments:

Operating expenses per income statement $624,000

Deduct: Increase in accounts payable

Deduct ($46,000 – $31,000) 15,000

Cash payments for operating expenses $609,000

(c) Income tax expense per income statement $ 40,000

Add: Decrease in income taxes payable

Add ($8,500 – $4,000) 4,500

Cash payments for income taxes $ 44,500

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NORMAN COMPANY Partial Statement of Cash Flows For the Year Ended December 31, 2012 Cash flows from operating activities

to net cash provided by operating activities:

Loss on sale of equipment 26,000

Decrease in income taxes payable (4,500) 118,500 Net cash provided by operating activities $208,500

Situation A: Cash flows from operating activities

Cash receipts from customers ($200,000 – $71,000) $129,000 Cash payments for operating expenses

($110,000 – $39,000) 71,000 Net cash provided by operating activities $ 58,000

Situation B: (a) Computation of cash payments to suppliers

Cost of goods sold $310,000 Plus: Increase in inventory 21,000

Decrease in accounts payable 17,000 Cash payments to suppliers $348,000

(b) Computation of cash payments for operating expenses

Operating expenses $230,000 Deduct: Decrease in prepaid expenses 8,000

Increase in accrued expenses payable 11,000 Cash payments for operating

expenses $211,000

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Adjustments to reconcile net income

activities:

Gain on sale of investment

[($200 – $165) X 100] (3,500)

Income from equity method investment

($27,000 X 30) (8,100)

Dividends from equity method

investment ($2,000 X 30) 600 40,000 Net cash provided by operating activities $185,000

It is part of the change in net accounts receivable.

No 4 is a significant noncash investing and financing activity.

No 6 is an increase in the investment account related to net income which does not increase cash flow The net income amount must be deducted from net cash flow from operating activities.

No 7 (dividends received) is added to net income Another alternative is

to net the Company’s pro-rata share of the dividend against the income from equity method investment amount reported in the cash flows from operating activities.

No 8 is not shown on a statement of cash flows.

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(a) Sales $538,800 Deduct: Increase in accounts receivable,

net of write-offs [$33,000 – ($30,000 – $3,800)] 6,800 Cash collected from customers $532,000

(b) Cost of goods sold $250,000 Deduct: Decrease in inventory ($47,000 – $31,000) 16,000 Purchases 234,000 Deduct: Increase in accounts payable

($25,000 – $17,000) 8,000 Cash payments to suppliers $226,000

(c) Interest expense $ 4,300 Deduct: Decrease in unamortized bond discount

($5,000 – $4,500) 500 Cash paid for interest $ 3,800

(d) Income tax expense $ 20,400 Add: Decrease in income taxes payable

($29,100 – $21,000)

8,100

Deduct: Increase in deferred income taxes

($5,300 – $4,600) 700 Cash paid for income taxes $ 27,800

(e) Selling expenses $141,500 Deduct: Depreciation ($3,000* X 1/3) $1,000

Bad debts expense 5,000 6,000 Cash paid for selling expenses $135,500

*($16,500 – $13,500)

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(a) The solution can be determined through use of a T-account for

prop-erty, plant, and equipment.

Property, Plant & Equipment 12/31/11 247,000

Equipment from exchange of B/P 25,000 45,000 Equipment sold

Payments for purchase of PP&E ?

12/31/12 277,000

Payments = $277,000 + $45,000 – $247,000 – $25,000

= $50,000 GAAP states that investing activities include the acquisition and disposition of long-term productive assets Accordingly, the purchase

of property, plant, and equipment is an investing activity Note that the acquisition of property, plant, and equipment in exchange for bonds payable would be disclosed as a noncash investing and financing activity.

(b) The solution can be determined through use of a T-account for

accu-mulated depreciation.

Accumulated Depreciation

167,000 12/31/11

38,000 Depreciation expense Equipment sold ?

178,000 12/31/12 Accumulated depreciation on equipment sold = $167,000 + $38,000 –

$178,000 = $27,000

The entry to reflect the sale of equipment is:

Cash (proceeds from sale of equipment)

($45,000 + $14,500 – $27,000) 32,500

Accumulated Depreciation 27,000

Property, Plant, and Equipment 45,000 (given) Gain on Sale of Equipment 14,500 (given)

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The proceeds from the sale of equipment of $32,500 are considered

an investing activity Investing activities include the acquisition and disposition of long-term productive assets.

(c) The cash dividends paid can be determined by analyzing T-accounts

for Retained Earnings and Dividends Payable.

Retained Earnings

91,000 12/31/11 Dividends declared ? 31,000 Net income

104,000 12/31/12 Dividends declared = $91,000 + $31,000 – $104,000

= $18,000

Dividends Payable

5,000 12/31/11 18,000 Dividends declared Cash dividends paid ?

8,000 12/31/12 Cash dividends paid = $5,000 + $18,000 – $8,000

= $15,000

Financing activities include all cash flows involving liabilities and holders’ equity other than operating items Payment of cash dividends

stock-is thus a financing activity.

(d) The redemption of bonds payable amount is determined by setting up

a T-account for Bonds Payable.

Bonds Payable

46,000 12/31/11 25,000 Issuance of B/P for PP&E Redemption of B/P ?

49,000 12/31/12

The problem states that there was no amortization of bond premium

or discount; thus, the redemption of bonds payable is the only change not accounted for.

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(Indirect Method) Cash flows from operating activities

Net income $ 810 Adjustments to reconcile net income to net cash

provided by operating activities:

Sale of held-to-maturity investments

[($1,470 – $1,300) + $80] 250

Purchase of plant assets [($1,900 – $1,700) – $70] (130)

Net cash provided by investing activities 120

Cash flows from financing activities

Issuance of capital stock [($1,900 – $1,700) – $70] 130

Retirement of bonds payable (250)

Payment of cash dividends (260)

Net cash used by financing activities (380)

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Net increase in cash 700 Cash, January 1, 2012 1,100 Cash, December 31, 2012 $1,800

Issuance of common stock for plant assets $ 70

FAIRCHILD COMPANY Statement of Cash Flows For the Year Ended December 31, 2012

(Direct Method) Cash flows from operating activities

Cash collections from customers $6,450* Cash paid for merchandise $4,000**

Cash paid for selling/administrative

expenses 950***

Cash paid for income taxes 540 5,490 Net cash provided by operating activities 960

Sale of held-to-maturity investments

[($1,470 – $1,300) + $80] 250

Purchase of plant assets [($1,900 – $1,700) – $70] (130)

Net cash provided by investing activities 120

Issuance of capital stock [($1,900 – $1,700) – $70] 130

Retirement of bonds payable (250)

Payment of cash dividends (260)

Net cash used by financing activities (380)

Net increase in cash 700 Cash, January 1, 2012 1,100 Cash, December 31, 2012 $1,800

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Issuance of common stock for plant assets $ 70

Cash received from customers $325,150 a

Cash paid to suppliers $151,000 b

Cash paid for operating expenses 82,000 c

Cash paid for interest 11,400 c

Cash paid for income taxes 8,750 d 253,150 a Net cash provided by operating activities 72,000 a

Sale of equipment

[$30,000 – ($30,000 X 7)] + $2,000 11,000

Purchase of equipment

[$154,000 – ($130,000 – $30,000)] (54,000)

Purchase of available-for-sale investments (17,000)

Net cash used by investing activities (60,000)

Principal payment on short-term loan (2,000)

Principal payment on long-term loan (7,000)

Dividend payments (6,000)

Net cash used by financing activities (15,000)

Net decrease in cash (3,000) Cash, January 1, 2012 9,000 Cash, December 31, 2012 $ 6,000

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a Sales $338,150

– Increase in accounts receivable (13,000)

Cash received from customers $325,150

b Cost of goods sold $175,000

– Increase in accounts payable (4,000)

– Increase in salaries and wages payable (4,000)

Cash paid for operating expenses $ 82,000

d Income tax expense $ 6,750

+ Decrease in income taxes payable 2,000

Cash paid for income taxes $ 8,750

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ANDREWS INC.

Statement of Cash Flows For the Year Ended December 31, 2012 Cash flows from operating activities

Net income $27,000 Adjustments to reconcile net income to net

cash provided by operating activities:

Depreciation expense $31,000*

Amortization of copyright 4,000

Gain on sale of equipment (2,000)

Decrease in inventories 20,000

Increase in salaries and wages payable 4,000

Increase in prepaid rent (1,000)

Decrease in income taxes payable (2,000) 45,000 Net cash provided by operating activities 72,000 Cash flows from investing activities

Sale of equipment [($30,000 X 30%) + $2,000] 11,000

Purchase of equipment

[$154,000 – ($130,000 – $30,000)] (54,000)

Purchase of available-for-sale investments (17,000)

Net cash used by investing activities (60,000) Cash flows from financing activities

Principal payment on short-term loan (2,000)

Principal payment on long-term loan (7,000)

Dividend payments (6,000)

Net cash used by financing activities (15,000) Net decrease in cash (3,000) Cash, January 1, 2012 9,000 Cash, December 31, 2012 $ 6,000 Supplemental disclosures of cash flow information:

Cash paid during the year for:

*$35,000 – [$25,000 – ($30,000 X 70%)]

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MORGANSTERN COMPANY Statement of Cash Flows For the Year Ended December 31, 2012 Cash flows from operating activities

Net income $ 46,000* Adjustments to reconcile net income to net

Depreciation expense $ 28,000

Loss on sale of investments 9,000

Loss on sale of plant assets

[($60,000 X 20) – $8,000] 4,000

Increase in current assets

other than cash (27,000)

Increase in current liabilities 18,000 32,000 Net cash provided by operating activities 78,000

Sale of plant assets 8,000

Sale of held-to-maturity investments 34,000

Purchase of plant assets (180,000)**

Issuance of bonds payable 75,000

Payment of dividends (10,000)

Net cash provided by financing activities 65,000 Net increase in cash 5,000 Cash balance, January 1, 2012 10,000 Cash balance, December 31, 2012 $ 15,000

*Net income $59,000 – $9,000 – $4,000 = $46,000

**Supporting computation

(purchase of plant assets)

Plant assets, December 31, 2011 $215,000

Less: Plant assets sold (60,000)

155,000 Plant assets, December 31, 2012 335,000

Plant assets purchased during 2012 $180,000

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(a) Computation of net cash provided by operating activities:

Net income ($8,000 + $9,000) – $5,000 $12,000 Adjustments to reconcile net income to net

Depreciation expense $17,000*

Loss on sale of equipment ($6,000 – $3,000) 3,000 Increase in accounts receivable

($45,000 – $55,000) (10,000) Increase in inventory

($45,000 – $65,000) (20,000) Decrease in prepaid expenses

($25,000 – $15,000) 10,000 Increase in accounts payable

($65,000 – $52,000) 13,000 Decrease in accrued expenses

($15,000 – $18,000) (3,000) 10,000 Net cash provided by operating activities $22,000

Net cash used by investing activities $(25,000)

(c) Computation of net cash provided (used) by financing activities:

Cash dividends paid $ (9,000)

Payment of notes payable (23,000)

Issuance of bonds payable 30,000

Net cash used by financing activities $ (2,000)

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Statement of Cash Flows For the Year Ended December 31, 2012 Cash flows from operating activities

Net income $30,250 Adjustments to reconcile net income to net

Sale of available-for-sale investments 12,875

Net cash provided by investing activities 1,875

Retirement of bonds payable (20,000)

Issuance of capital stock 10,000

Net cash used by financing activities (19,375) Net increase in cash 24,250 Cash, January 1, 2012 8,500 Cash, December 31, 2012 $32,750 Noncash investing and financing activities

Issuance of bonds for land $22,500

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Balance Sheet December 31, 2012

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POPOVICH COMPANY Statement of Cash Flows (partial) For the Year Ended December 31, 2012 Cash flows from operating activities

Net income $ 50,000 Adjustments to reconcile net income to net

Loss on sale of equipment 5,800 22,600

Net cash provided by operating activities 72,600

Purchase of machinery (62,000)

Sale of machinery

[($66,000 – $25,200) – $5,800] 35,000

Extraordinary repairs on machinery (21,000)

Cost of machinery constructed (48,000)

Payment of cash dividends (15,000)

Decrease in cash (38,400) Cash, January 1, 2012 xxx Cash, December 31, 2012 $ xxx

Accumulated Depreciation—Machinery 16,800

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Machinery 110,000

Investing—Purchase of Machinery 62,000 Investing—Construction of Machinery 48,000

Accumulated Depreciation—Machinery 21,000

Investing—Extraordinary Repairs to Machinery 21,000

Operating—Loss on Sale of Equipment 5,800

5 Retained Earnings 123,000

Dividends Payable 123,000

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LOWENSTEIN CORPORATION Worksheet for Preparation of Statement of Cash Flows

For the Year Ended December 31, 2012

2012 Reconciling Items Debits

Balance at 12/31/11

Debit Credit

Balance at 12/31/12

Cash $ 24,000 (17) $ 7,500 $ 16,500 Short-term

investments 19,000 (2) $ 6,000 25,000 Accounts receivable 45,000 (3) 2,000 43,000 Prepaid expenses 2,500 (4) 1,700 4,200 Inventory 57,000 (5) 24,500 81,500

Buildings 78,500 (10) 46,500 125,000 Equipment 46,000 (11) 7,000 53,000 Delivery equipment 39,000 39,000 Patents (12) 15,000 15,000 Total debits $361,000 $452,200

Credits

Accounts payable $ 16,000 (6) $10,000 $ 26,000 Short-term notes

payable (trade) 6,000 (7) $ 2,000 4,000 Accrued payables 4,600 (8) 1,600 3,000 Allowance for doubtful

accounts 2,000 (3) 200 1,800 Accum depr.—bldg 23,000 (13) 7,000 30,000 Accum depr.—equip 15,500 (13) 3,500 19,000 Accum depr.—del.

equip 20,500 (13) 1,500 22,000 Mortgage payable 53,400 (14) 19,600 73,000 Bonds payable 62,500 (16) 12,500 50,000 Common stock 102,000 (15) 38,000 140,000 Paid-in capital in excess 4,000 (15) 6,000 10,000 Retained earnings 51,500 (9) 10,000 (1) 31,900 73,400 Total credits $361,000 $452,200

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Inc in accounts payable (6) 10,000

Dec in notes payable (7) 2,000

Dec in accrued payables (8) 1,600

Payment of cash dividends (9) 10,000

Issuance of mortgage payable (14) 19,600

Sale of common stock (15) 44,000

Retirement of bonds (16) 12,500

Totals 246,300 253,800

Decrease in cash (17) 7,500

Totals $253,800 $253,800

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TIME AND PURPOSE OF PROBLEMS

Problem 23-1 (Time 40–45 minutes)

Purpose—to develop an understanding of the procedures involved in the preparation of a statement of cash flows The student is required to prepare the statement using the indirect method.

Purpose—to develop an understanding of the procedures involved in the preparation of a statement of cash flows, including a schedule of noncash investing and financing activities The student is required

to prepare the statement using the indirect method, and consider the proper treatment of an nary item.

extraordi-Problem 23-3 (Time 50–60 minutes)

Purpose—to develop an understanding of the procedures involved in the preparation of a statement of cash flows The student is required to prepare the statement using the direct method.

Purpose—to develop an understanding of the procedures involved in the preparation of a statement of cash flows The student is required to prepare the statement using the direct method, including a reconciliation schedule.

Purpose—to develop an understanding of the procedures involved in the preparation of a statement

of cash flows, including the treatment accorded unusual and extraordinary items The student is required to prepare the statement using the indirect method, and include any supporting schedules or computations.

Purpose—to develop an understanding of the procedures involved in the preparation of a statement of cash flows The student is required to prepare the statement using the indirect method The student also must calculate the net cash flow from operating activities using the direct method.

Purpose—Using comparative financial statement data, the student is required to prepare the statement

of cash flows, using the direct method The student must also prepare the operating activities section of the statement of cash flows using the indirect method.

Purpose—to develop an understanding of both the direct and indirect method The student is first asked

to compute net cash provided by operating activities under the direct method In addition a statement of cash flows using the indirect method must be computed.

Purpose—to develop an understanding of the indirect method In the second part, the student is asked

to determine how operating, investing and financing sections of the statement of cash flows will change under various situations.

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activities:

Depreciation $147,000 (a)

Gain on sale of equipment (2,000) (b)

Equity in earnings of Myers Co (35,000) (c)

Increase in inventories (135,000)

Decrease in income taxes payable (20,000) 55,000 Net cash provided by operating

activities 425,000

Cash flows from investing activities:

Proceeds from sale of equipment 40,000

Loan to TLC Co (300,000)

Principal payment of loan receivable 50,000

Net cash used by investing

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PROBLEM 23-1 (Continued)

Schedule at bottom of statement of cash flows:

Noncash investing and financing activities:

Issuance of lease obligation for capital lease $400,000 Explanation of Amounts

(a) Depreciation

Net increase in accumulated

depreciation for the year ended

December 31, 2012 $125,000 Accumulated depreciation on equipment sold:

Cost $60,000

Carrying value 38,000 22,000 Depreciation for 2012 $147,000

(b) Gain on sale of equipment

Proceeds $ 40,000 Carrying value (38,000)

Gain $ 2,000

(c) Equity in earnings of Myers Co.

Myers’s net income for 2012 $140,000 Sullivan’s ownership X 25% Undistributed earnings of Myers Co $ 35,000

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PROBLEM 23-2

HINCKLEY CORPORATION Statement of Cash Flows For the Year Ended December 31, 2012 Cash flows from operating activities

Net income $14,750 (a) Adjustments to reconcile net income

activities:

Loss on sale of equipment $ 4,100 (b)

Gain from flood damage (8,250)*

Depreciation expense 1,900 (c)

Patent amortization 1,250

Gain on sale of investments (1,700)

Increase in accounts receivable (net) (3,750)**

Proceeds from flood damage to building 32,000

Net cash provided by investing activities 19,200

Payment of short-term note payable (1,000)

Net cash used by financing activities (6,000)

Increase in cash 20,500 Cash, January 1, 2012 13,000 Cash, December 31, 2012 $33,500

*($30,000 + $2,000) – ($29,750 – $6,000)

**($12,250 – $3,000) – ($10,000 – $4,500)

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