Solution manual managerial accounting concept and applications by cabrera chapter 06 answer

Because cash flows from operating activities may differ substantially from net income, and because numerous other financing and investing activities have an impact on financial position,

shareholders and interest and principal to creditorsd To show the

relationship of net income to changes in the business s cash.2.� Comparative balance sheets present the financial position of the enterprise at two points intime The income statement for the period between the two balance sheets

describes how the income-producing activities affected the financial position Because cash flows from operating activities may differ substantially from net income, and because numerous other financing and investing activities have an impact on financial position, the statement of cash flows is necessary The statement emphasizes changes in the cash balances that result from changes in assets, liabilities and equity accounts caused by operating, investing and financing activities.3 The most important source of cash for many successful companies is from operating activities A large positive operating cash flow is

a good sign because it means funds have been internally generated with no fixed obligations or commitment to return such to anybody.4 It is possible for cash to decrease during a year when income is high because cash may be used not only for operating activities but also for investing and financing activities.5

Transactions involving accounts payable are not considered to be financingactivities because such transactions are used to obtain goods and services rather than to obtain cash Furthermore, purchases of goods and services relate

to a company s day-to-day operating activities.6.� The loss is added back to net income to avoid double counting since the entire proceeds from the sale (netbook value minus loss on sale) will appear as a cash inflow from investing activities.7 Three categories of transactions that may result in increases

in cash area Operating activitiesb Investing activities (e.g., sale of investments or other assets).c Financing activities (e.g., borrowing or sale of shares) These activities are sources of cash when cash is increased as

a result of the particular activity.8 Three categories of transactions that may result in decreases in cash area Operating activitiesb Investing activities (e.g., purchase of investments or other assets).c Financing activities (e.g., repayment of debt or retirement of shares) These

activities are uses of cash when cash is decreased as a result of the particularactivity.9 Noncash transactions do not provide or consume cash even though theymay result in significant changes in financial position Examples are the issuance of share capital for plant assets and the conversion of debt or

preference shares into ordinary shares Such transactions are not presented in the body of the statement of cash flows but rather disclosed in a separate schedule as financing or investing activities.10 While net loss is usually associated with a decrease in cash, it may be a source of cash if noncash

expenses are greater than the amount of the net loss For example, if a net loss of P100,000 included amortization and depreciation of P125,000 and no noncash revenues existed, cash provided by operating activities would be

P25,000, computed as follows:Net loss P(100,000)Add: Expenses not requiring cash depreciation � and amortization 125,000Net cash

provided by operating activities P 25,00011 The change in cash is the difference between cash at the beginning and end of the accounting period The net amount of cash provided by or used in operating, investing and financing activities must equal this change in cash For example, if cash increased by P150,000 during the year, total sources from operating, investing, and financingactivities must exceed total uses by P150,000 Also, if cash decreased by P25,000 during the year, total uses of cash must exceed total sources by

P25,000.12 (a) The use of cash does not occur until the cash dividend is actually paid in the next period The declaration of the dividend does affect financial position, however, and should be disclosed as a noncash financing activity in a separate schedule accompanying the statement of cash flows (b)

Because the dividend was declared and paid in the same accounting period,

it appears in the statement of cash flows as a cash decrease in the financing activities category.13 Disagree The refunding of 10% debt by the 8% debt represents a significant financing activity, even though the net impact of the exchange on the balance sheet or on the amount of cash is not material The issuance of 8% bonds and the retirement of 10% bonds should be reported as noncash financing transactions in a schedule accompanying the statement of cash flows.14 The net income figure includes P150,000 as an expense Only

P112,500 of this amount resulted in a decrease in cash, because P37,500

represents an increase in the deferred income tax liability account In

determining cash provided by operating activities, the amount of income tax paid

is P112,500 (direct method) Alternatively, under the indirect method, P37,500 must be added to net income to determine cash flows from operating activities

15 The loss is omitted when listing expenses requiring cash payment (direct approach) or added back to net income (indirect approach) in determining cash provided by operating activities This eliminates the impact of the transactionfrom cash provided by operating activities Then, the proceeds from the sale are included as a source of cash in the investing activities category of the statement of cash flows Any tax effects of the transaction are included in thetax expense figure and remain a part of cash flows from operating activities.16

(1) Operating activities: Transactions that affect current assets, currentliabilities, or net income (2) Investing activities: Transactions that

involve the acquisition or disposition of noncurrent assets (3) Financingactivities: Transactions (other than the payment of interest) involving

borrowing from creditors, and any transactions (involving the owners of a

company.17 Interest is included as an operating activity since it is part of net income Financing activities are narrowly defined to include only the

principal amount borrowed or repaid.18 Since the entire proceeds from a sale

of an asset (including any gain) appear as a cash inflow from investing

activities, the gain must be deducted from net income to avoid double counting

19 The direct method reconstructs the income statement on a cash basis by restating revenues and expenses in terms of cash inflows and outflows The indirect method starts with net income and adjusts it to a cash basis to

determine the cash provided by operating activities.20 An increase in the Accounts Receivable account must be deducted from net income under the indirect method because this is an increase in a noncash asset.21 A decrease in the Accounts Payable account must be added to cost of goods sold under the direct method The cost of goods sold is increased by the amount of the decrease in accounts payable Because the cost of goods sold is increased, the net cash flowprovided by operating activities is decreased The effect of a decrease in a liability is a decrease in cash.22 A sale of equipment for cash would be

classified as an investing activity Any transaction involving the acquisition

or disposition of noncurrent assets is classified as an investing activity.II

ExercisesExercise 1 Net income ##P84,000##Adjustments to convert net income to a cash basis:####Depreciation charges for the year

#P50,000###Increase in accounts receivable #(60,000)###Increase in inventory #(77,000)###Decrease in prepaid expenses #2,000###Increase in

accounts payable #30,000###Decrease in accrued liabilities #(4,000)###Increase

in deferred income taxes #���6,000#(53,000)##Net cash provided by operatingactivities ##P31,000##Exercise 2Sales # P1,000,000###Adjustments to a cash basis:####Less increase in accou#n#t#s# #r#e#c#e#i#v#a#b#l#e# ### ##

# #6#0#,#0#0#0###P#9#4#0#,#0#0#0#############C#o#s#t# #o#f# #g#o#o#d#s#

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#a#c#t#i#v#i#t#i#e#s# #f#i#g#u#r#e# #u#n#d#e#r# #t#h#e# #i#n#d#i#r#e#c#t#

#m#e#t#h#o#d# #i#n# #t#h#e# #p#r#e#v#i#o#u#s# #e#x#e#r#c#i#s#e#.##

#E#x#e#r#c#i#s#e# #3###I#t#e#m###A#m#o#unt#Add#Deduct##Accounts Receivable

#P70,000#decrease#X###Accrued Interest Receivable

#P6,000#increase##X##Inventory #P110,000#increase##X##Prepaid

Expenses #P3,000#decrease#X###Accounts Payable

#P40,000#decrease##X##Accrued Liabilities #P9,000#increase#X###Deferred Income Taxes Liability #P15,000#increase#X###Sale of equipment

#P8,000#gain##X##Sale of long-term investments #P12,000#loss#X###Exercise 4Requirement (1) #Net income ##P75###Adjustments to convert net income to a cash basis:#####Depreciation charges #P40####Decrease in accounts

receivable #10####Increase in inventory #(30)####Decrease in prepaid expenses

#5####Increase in accounts payable #20####Decrease in accrued liabilities

#(10)####Increase in taxes payable #10####Increase in deferred taxes

#5####Loss on sale of long-term investments #5####Gain on sale of land

#(40)# 15###Net cash provided by operating activities� ##P90##Requirement (2) #Swan Company###Statement of Cash Flows###Operating activities:#####Net cash provided by oper#a#t#i#n#g# #a#c#t#i#v#i#t#i#e#s# #(#s#e#e# #a#b#o#v#e#)#

#####P## 9#0#################I#n#v#e#s#t#i#n#g#

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#&# #e#q#u#i#p#m#e#n#t# ###(#1#5#0#)#########N#e#t# #c#a#s#h# #u#s#e#d# #for investing activities ##(55)########Financing activities:#####Decrease in bonds payable #(20)####Increase in ordinary shares #40####Cash dividends

# (35)####Net cash used by financing activities� ## (15)########Net increase�

in cash (net cash flow) ##20###Cash balance, beginning ## 100###Cash �

balance, ending ##P120##While not a requirement, a worksheet may be helpful

#Change##Source or Use?##Cash Flow Effect##Adjust-ments##Adjusted

Effect##Classification##Assets (except cash and cash equivalents)##Current assets:#############Accounts receivable

# 10##Source##+10####+10##Operating##Inventory�

#+30##Use## 30#### 30##Operating##Prepaid expenses� �

# 5##Source##+5####+5##Operating##Noncurrent assets:#############Long-term�investments # 30##Source##+30## 50## 20##Investing##Plant and equipment� � �

# 35##Use## 35#### 35##Financing####Additional entries##Proceeds from sale� � �

of investments #######+45##+45##Investing##Loss on sale of investments

#######+5##+5##Operating##Proceeds from sale of land

#######+70##+70##Investing##Gain on sale of land

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###+#3#0#######I#n#c#r#e#a#s#e# #i#n# #accounts payable

#��20#260##Selling and administrative expenses #280###Adjustments to a cash basis:####Decrease in prepaid expenses # 5###Decrease in accrued �

liabilities #+10###Depreciation charges #��40#245##Income taxes

#30###Adjustments to a cash basis:####Increase in taxes payable

# 10###Increase in deferred taxes� #���5#���15##Net cash provided by operating activities

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###2#5#######I#ncrease in accounts receivable #(80)###Decrease in

inventory #35###Increase in prepaid expenses #(2)###Increase in accounts payable #75###Decrease in accrued liabilities #(10)###Gain on sale of investments #(5)###Loss on sale of equipment #2###Increase in deferred income taxes #����8#��48##Net cash provided by operating activities

## 104######Investing activities:####Proceeds from sale of long-term �investments #12###Proceeds from sale of equipment #18###Additions to plant and equipment #(110)###Net cash used for investing activities

##(80)######Financing activities:####Increase in bonds payable

#25###Decrease in ordinary shares #(40)###Cash dividends # (16)###Net �cash used for financing activities ## (31)######Net decrease in cash�

##(7)##Cash balance, January 1, 2008 ##���11##Cash balance, December

31, 2008

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# 7##Source##+7## 7##0##Investing###############Liabilities, Contra � �

assets, and Shareholders Equity##Contra assets:#############Accumulated �

#1# ###T#r#a#n#saction#Operating#Investing#Financing#Source#Use##Short-term investment securities were purchased #X####X##Equipment was purchased ##X###X##Accounts payable increased #X###X###Deferred taxes decreased #X####X##Long-term bonds were issued ###X#X###Ordinary shares were sold ###X#X###Interest was paid to long-term creditors #X####X##A long-term mortgage wasentirely paid off ###X##X##A cash dividend was declared and paid ###X##

X##Inventories decreased #X###X###Accounts receivable increased #X####X##Depreciation charges totaled P200,000 for the year#X###X###Problem 2

(Analysis of Cash Flow Transactions)Requirement (a)The eight items should be presented in the statement of cash flows as follows:1 Net income is the basis for the calculation of cash flows from operating activities by starting with that number and adjusting for noncash revenue and expense transactions (indirect method) or by computing by the direct method the positive cash flows from revenues, less the negative cash flows from expenses The cash flows from the transaction giving rise to the extraordinary loss is reclassified as an investing activity.2 The acquisition of intangibles is a negative cash flow from investing activities The amortization is a noncash expense in determining cash flows from operating activities.3 The payment of a cash dividend is a negative cash flow that is presented in the financing activities section of the statement.4 The purchase of treasury share is a negative cash flow in the financing activities section of the statement.5 The depreciation expense recognized during the year is a noncash expense in determining cash flows from operating activities.6 The conversion of convertible bonds into ordinary shares

is a noncash financing activity that requires disclosure in a separate schedule

7 The changes in plant asset accounts land, equipment, and building � �represent activities whose cash flow effects are presented in the investing activities section of the statement.8 The increase in working capital also represents the change in cash because all other current assets and current liabilities remained constant The net of all cash flows from operating,

investing and financing activities must reconcile with the change in cash in thestatement of cash flows.Requirement (b)1 Net cash provided by operating

activities Net income P145,000 Noncash expense adjustments:

Depreciation expense 46,250 Amortization expense6,000 Reclassification of extraordinary loss 15,000

P212,2502 Net cash used in investing activitiesPurchase of intangible assets P (34,000) Purchase of land (130,000)

Purchase of equipment (60,000) Purchase of building(100,000) Sale of land 165,000

P(159,000)3 Net cash used in financing activities Purchase

of treasury shares P(31,000) Payment of dividends

(12,500) P(43,500)Computations: Depreciation expense

Change in accumulated depreciation account P35,000Accumulated depreciation on fully depreciated assets disposed

land account P (50,000) Cost of land sold in condemnation

proceedings 180,000 P130,000Problem 3 (Cash Flow fromOperating Activities)Cash received from customers: Total revenues P185,000

Less: Note receivable (15,000) P170,000Cash disbursed for

expenses: Total expenses (P173,000 + P4,200) P177,200 Less: Income taxes deferred (1,260) Depreciation (25,000)

Amortization (7,000) (143,940)Net cash provided by

operating activities P 26,060 Problem 4 (Cash Flow from Operating

Activities)Cash received from customers (1) P5,237,000Cash paid for expenses: Cost of goods sold P3,150,000 Selling 246,000

Salaries and wages (2) 394,400 Interest (3) 65,200

Miscellaneous operating 5,000 Incomes taxes (4) 335,000 4,195,600Net cash provided by operating activities P1,041,400Computations:1

Revenue from sales P5,432,000 Less: Note receivable (120,000)

Salaries and wages expense P 400,000 Less: Increase in accrued

salaries and wages (P45,600 P40,000)� (5,600)

P 394,400 3 Interest expense P 72,000

65,2004 Income tax expense P 445,000 Less: Deferred portion (110,000) P 335,000Problem 5 (Statement of Cash Flows Preparation Indirect)Green Tea CompanyStatement of Cash FlowsFor the �Year Ended December 31, 2005Cash flows from operating activities ####Net

income*#P8,500###Adjustments to reconcile net income to net cash flows provided

by operating activities:####Depreciation#1,000###Amortization of

intangibles#1,000###Increase in current assets# (6,000)###Increase in current liabilities# 3,000### Net cash provided by operating

activities##P7,500######Cash flows from financing activities####Dividends

paid#(1,500)###Retirement of long-term liabilities#(1,000)### Net cash used

in financing activities## (2,500)##Net increase in cash##P 5,000##Cash, January 1, 2005## 10,000##Cash, December 31, 2005##P15,000##Problem 6 (Cash Flow Statement Preparation Direct)Requirement (a) Hundred Acre Company�

Statement of Cash FlowsFor the Year Ended December 31, 2005Cash flows from operating activities ####Cash received from customers#P74,000###Cash paid for expense# 67,000### Net cash provided by operating activities##P7,000##Cash flow from investing activities#### Sale of equipment#9,500### Sale of

investments#15,000### Acquisition of equipment# (53,000)### Net cash used in investing activities##(28,500)##Cash flows from financing

activities####Sale of ordinary shares#40,000###Payment of cash dividends# (8,500)### Net cash used in financing activities## 31,500##Net increase in cash##P10,000##Cash, January 1, 2005## 20,000##Cash, December 31,

2005##P30,000##Reconciliation of net income to net cash provided by operating activities:####Net income#P15,000###Adjustments to reconcile net income to net cash provided by operating activities:####Depreciation

expense#24,500*###Amortization expense#1,000###Increase in accounts

receivable#(33,000)###Decrease in accrued expenses# (500)###Net cash

provided by operating activities#P 7,000###Computations:Cash received from customers: Revenues P107,000 Deduct: Increase in

received on sale of shares: Increase in ordinary shares amount

(P100,000 P75,000)� P 25,000 Increase in additional paid-in capital

transactions that account for the difference.Problem 7 (Interpretation of Cash Flow Statement)Requirement (a)The two companies are similar in the following

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