Chapter 4 Reporting and Analyzing Cash Flows Learning Objectives – coverage by question LO1 – Explain the purpose of the statement of cash flows and how it complements the income statement and balance sheet. LO2 – Construct and explain the statement of cash flows. LO3 – Compute and interpret ratios that reflect a company’s liquidity and solvency. LO4 – Appendix 4A: Use a spreadsheet to construct the statement of cash flows.
MiniExercises
Exercises
Problems
Cases and Projects
21, 22, 24
38, 39, 44
47, 51, 54
57 - 59
21 - 31
34 - 44
45 - 56
57 - 59
32, 33,
46, 48, 50,
35, 43
52, 55, 56
59
55
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4-1
DISCUSSION QUESTIONS Q4-1.
Cash equivalents are short-term, highly liquid investments that firms acquire with temporarily idle cash to earn interest on these excess funds. To qualify as a cash equivalent, an investment must (1) be easily convertible into a known cash amount and (2) be close enough to maturity so that its market value is not sensitive to interest rate changes (generally, investments with initial maturities of three months or less). Three examples of cash equivalents are treasury bills, commercial paper, and money market funds.
Q4-2.
Cash equivalents are included with cash in a statement of cash flows because the purchase and sale of such investments are considered to be part of a firm's overall management of cash rather than a source or use of cash. Similarly, as statement users evaluate cash flows, it may matter very little to them whether the cash is on hand, deposited in a bank account, or invested in cash equivalents.
Q4-3.
Operating activities Inflow: Cash received from customers Outflow: Cash paid to suppliers Investing activities Inflow: Sale of equipment Outflow: Purchase of stocks and bonds Financing activities Inflow: Issuance of common stock Outflow: Payment of dividends
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Financial Accounting, 4th Edition
Q4-4.
a. Investing; outflow. b. Investing; inflow. c. Financing; outflow. d. Operating (direct method, not shown separately under indirect method); inflow. e. Financing; inflow. f. Operating (direct method, not shown separately under indirect method); inflow. g. Operating (direct method, not shown separately under indirect method); outflow. h. Operating (direct method, not shown separately under indirect method); inflow.
Q4-5.
This is a noncash investing and financing event. It must be reported in a supplementary schedule to the statement of cash flows.
Q4-6.
Noncash investing and financing transactions are disclosed as supplemental information to a statement of cash flows because a secondary objective of cash flow reporting is to present information about investing and financing activities. Noncash investing and financing transactions, generally, affect future cash flows. Issuing bonds payable to acquire equipment, for example, requires future cash payments for interest and principal on the bonds. On the other hand, converting bonds payable into common stock eliminates future cash payments related to the bonds. Knowledge of these types of events, therefore, should be helpful to users of cash flow data who wish to assess a firm's future cash flows.
Q4-7.
A statement of cash flows helps external users assess the amount, timing, and uncertainty of future cash flows to the enterprise. These assessments help users evaluate their own future cash receipts from their investments in, or loans to, the firm. A statement of cash flows shows the periodic cash effects of a firm's operating, investing, and financing activities. Distinguishing among these different categories of cash flows helps users compare, evaluate, and predict cash flows. With cash flow information, creditors and investors are better able to assess a firm's ability to settle its liabilities and pay its dividends. Over time, the statement of cash flows permits users to observe and analyze management's investing and financing policies. A statement of cash flows also provides information useful in evaluating a firm's financial flexibility (which is its ability to generate cash to respond to unanticipated needs and opportunities).
Q4-8.
The direct method presents the net cash flow from operating activities by showing the major categories of operating cash receipts and cash payments (such as cash received from customers, cash paid to employees and suppliers, cash paid for interest, and cash paid for income taxes). The indirect (or reconciliation) method, in contrast, presents the net cash flow from operating activities by applying a series of adjustments to the accrual net income to convert it to a cash basis. ©Cambridge Business Publishers, 2014
Solutions Manual, Chapter 4
4-3
Q4-9.
Under the indirect method, depreciation is added to net income because, as a noncash expense, it was deducted in computing net income. Adding depreciation to net income, therefore, eliminates it from the cash-basis income amount. Amortization and depletion expenses are handled the same way.
Q4-10. Under the indirect method, the $98,000 cash received from the sale of the land will appear in the cash flows from investing activities section of the statement of cash flows. In addition, the $28,000 gain from the sale will be deducted from net income as one of the adjustments made to determine the net cash flow from operating activities. Q4-11. Net income $ 88,000 Add (deduct) items to convert net income to cash basis Depreciation expense Subtract change in accounts receivable Subtract change in inventory Add change in accounts payable Add change in income tax payable Net cash provided by operating activities
6,000 13,000 (9,000) (3,500) 1,500 $ 96,000
Q4-12. The separate disclosures required for a company using the indirect method in the statement of cash flows are (1) cash paid during the year for interest (net of amount capitalized) and for income taxes, (2) all noncash investing and financing transactions, and (3) the policy for determining which highly liquid, short-term investments are treated as cash equivalents. Q4-13. The statement of cash flows will show a positive net cash flow from operating activities if operating cash receipts exceed operating cash payments. This could happen, for example, if noncash expenses (such as depreciation and amortization) exceed the net loss. It would also happen if operating cash receipts exceed sales by more than the loss or if operating cash payments are less than accrual expenses by more than the loss (or some combination of these events). Q4-14. Sales + Accounts receivable decrease = Cash received from customers
$925,000 14,000 $939,000
Q4-15. Wages expense + Wages payable decrease = Cash paid to employees
$ 86,000 1,100 $ 87,100
Q4-16.
$ 43,000 1,600 $ 44,600
Advertising expense + Prepaid advertising increase = Cash paid for advertising
Q4-17. Under the direct method, the $5,100 cash received from the sale of equipment will appear in the cash flows from investing activities section of the statement of cash flows.
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Financial Accounting, 4th Edition
Q4-18. The separate disclosures required for a company using the direct method in the statement of cash flows are (1) a reconciliation of net income to net cash flow from operating activities, (2) all noncash investing and financing transactions, and (3) the policy for determining which highly liquid, short-term investments are treated as cash equivalents. Q4-19. The operating cash flow to current liabilities ratio is calculated by dividing net cash flow from operating activities by average current liabilities. This ratio is a measure of a firm's ability to liquidate its current liabilities. Q4-20. The operating cash flow to capital expenditures ratio is calculated by dividing a firm's cash flow from operating activities by its annual capital expenditures. A ratio below 1.00 means that the firm's current operating activities are not providing enough cash to cover the capital expenditures. A ratio above 1.0 is normally considered a sign of financial strength.
©Cambridge Business Publishers, 2014 Solutions Manual, Chapter 4
4-5
MINI EXERCISES M4-21. (5 minutes) a. Positive adjustment b. Negative adjustment c. Negative adjustment d. Positive adjustment e. Positive adjustment
M4-22. (10 minutes) a.
Cash flow from an operating activity.
b.
Cash flow from an investing activity.
c.
Cash flow from an investing activity.
d.
Cash flow from an operating activity.
e.
Cash flow from a financing activity.
f.
Cash flow from a financing activity.
g.
Cash flow from an investing activity.
M4-23. (15 minutes)
1 2 3 4 5 6 7 8 9 10 11
DOLE FOOD COMPANY, INC. Selected Items from the Cash Flow Statement Long-term debt repayments Change in receivables Depreciation and amortization Change in accrued liabilities Dividends paid Change in income taxes payable Cash received from sales of assets and businesses Net income Change in accounts payable Short-term debt borrowings Capital expenditures
Financing Operating Operating Operating Financing Operating Investing Operating Operating Financing Investing
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Financial Accounting, 4th Edition
M4-24. (10 minutes) a.
(3) Cash flow from a financing activity.
b.
(1) Cash flow from an operating activity.
c.
(4) Noncash investing and financing activity.
d.
(1) Cash flow from an operating activity.
e.
(1) Cash flow from an operating activity.
f.
(5) None of the above (a change in the composition of cash and cash equivalents).
M4-25. (30 minutes) a. Income Statement
Balance Sheet +
Accts. Receivable
(1)
+
+507,400 +
(2)
+91,500 +
(3)
Transaction
Cash Asset
+
Contrib. + Capital
=
+
+
+507,400
+507,400 -
=
+507,400
+
=
+
+
+91,500
+91,500 -
=
+91,500
+
+
–320,100 =
+
+
–320,100
-
+320,100 =
–320,100
(4)
+
+
–63,400 =
+
+
–63,400
-
+63,400 =
–63,400
(5)
+
+
+351,600 =
+351,600 +
+
-
=
(6)
-47,700 +
+
+47,700 =
+
+
-
=
(7)
+483,400 +
–483,400 +
=
+
+
-
=
(8)
–340,200 +
+
=
–340,200 +
+
-
=
(9)
-172,300 +
+
=
+
+
-172,300
-
+172,300 =
-172,300
Total
+14,700 +
+24,000 +
+15,800 =
+11,400 +
+
+43,100
-
+555,800 =
+43,100
+
Inventories
=
Accts. Payable
Earned Capital
Revenue
+598,900
- Expenses =
Net Income
b. Net income was €43,100 (from the net income column), and cash flow from operating activities was €14,700 (from the cash column). c. 1. Accounts receivable increased by €24,000, 2. Inventories increased by €15,800, and 3. Accounts payable increased by €11,400. continued next page
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M4-25. concluded d. The accounting equation is kept with every entry, so it is kept for the totals over the period. Cash flow + change in accounts receivable + change in inventory = Change in accounts payable + net income. This relationship can be presented in the following indirect method cash flow from operating activities. Net income € 43,100 - Change in accounts receivable –24,000 - Change in inventories –15,800 + Change in accounts payable +11,400 Cash flow from operating activities € 14,700 M4-26. (15 minutes –INDIRECT METHOD) Net income Add (deduct) items to convert net income to cash basis Add back depreciation Subtract gain on sale of investments Subtract change in operating assets: Accounts receivable Inventory Prepaid rent Add change in operating liabilities: Accounts payable Income tax payable Net cash provided by operating activities
$ 45,000 8,000 (9,000) (9,000) (6,000) 2,000 4,000 (2,000) $ 33,000
©Cambridge Business Publishers, 2014 4-8
Financial Accounting, 4th Edition
M4-27. (30 minutes) a. Balance Sheet Transaction
Cash Asset
(1) (2)
+46,200
(3)
Accts. Receivable
+
+ +769,200
+
-
+
+
+
+
+
(4)
–149,100
+
+
(5)
–521,600
+
+
+
+
(6)
Prepaid Rent
+149,100
–117,900
+
Contr. + Capital
Earned Capital
=
+
+
+769,200
+769,200 -
=
+769,200
-
=
+
+
+46,200
+46,200 -
=
+46,200
-
=
+
+
–526,700
-
+526,700 =
–526,700
-
=
+
+
-
=
-
=
+
+
-
=
-
=
+
+
-
+117,900 =
-
=
-
Accum. Deprec.
Income Statement
=
Wages Payable
+526,700
–521,600
–117,900
Revenue
- Expenses =
Net Income
–117,900
(7)
+724,100
+ –724,100
+
-
=
+
+
(8)
–122,800
+
+
-
=
+
+
–122,800
-
+122,800 =
–122,800
+
+
-
+23,000
=
+
+
-23,000
-
+23,000 =
-23,000
-
+23,000
=
+
+
+25,000
+815,400 -
+790,400 =
+25,000
(9) Total
–23,200
+
+45,100
+
+31,200
+5,100
b. Net income was $25,000 (from the net income column), and cash flow from operating activities was –$23,200 (from the cash column). c. 1. Accounts receivable increased by $45,100, 2. Prepaid rent increased by $31,200, 3. Accumulated depreciation (a contra-asset) increased by $23,000 due to depreciation expense. and 4. Wages payable increased by $5,100. d. The accounting equation is kept with every entry, so it is kept for the totals over the period. Cash flow + change in accounts receivable + change in prepaid rent – change in accumulated depreciation = Change in wages payable + net income. This relationship can be presented in the following indirect method cash flow from operating activities. Net income $ 25,000 + Depreciation expense 23,000 – Change in accounts receivable –45,100 – Change in prepaid rent –31,200 + Change in wages payable +5,100 Cash flow from (used in) operating activities ($ 23,200)
©Cambridge Business Publishers, 2014 Solutions Manual, Chapter 4
4-9
M4-28. (15 minutes—INDIRECT METHOD) Net loss Add (deduct) items to convert net loss to cash basis Add back depreciation Subtract change in operating assets: Accounts receivable Inventory Prepaid expenses Add change in operating liabilities: Accounts payable Accrued liabilities Net cash provided by operating activities
$(21,000) 8,600 9,000 3,000 3,000 4,000 (2,600) $ 4,000
Weber Company's 2013 operating activities provided $4,000 cash. The dividend paid to shareholders affects cash flows from financing activities.
M4-29. (20 minutes) A “+” indicates that the amount is added and a “-“ indicates that it is subtracted when preparing the cash flow statement using the indirect method.
1 2 3 4 5 6 7 8 9 10 11 12 13 14
NORDSTROM, INC. Consolidated Statement of Cash Flows – Selected Items Increase in accounts receivable Operating Capital expenditures Investing Proceeds from long-term borrowings Financing Increase in deferred income tax net liability Operating Principal payments on long-term borrowings Financing Increase in merchandise inventories Operating Decrease in prepaid expenses and other assets Operating Proceeds from issuances under stock compensation plans Financing Increase in accounts payable Operating Net earnings Operating Payments for repurchase of common stock Financing Increase in accrued salaries, wages and related benefits Operating Cash dividends paid Financing Depreciation and amortization expenses Operating
+ + + + + + + +
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Financial Accounting, 4th Edition
M4-30. (15 minutes—DIRECT METHOD) a.
Rent expense – Prepaid rent decrease = Cash paid for rent
$ 60,000 (2,000) $ 58,000 Balance Sheet
Transaction
Cash
Begin Balance Make rent payment
+ +
-X
+
Record rent expense
+
End Balance
+
Noncash Assets
10,000 Prepaid rent +X Prepaid Rent -60,000 Prepaid Rent 8,000
Income Statement
= Liabilities +
Contr. + Capital
Earned Surplus
Revenue
-
Expenses
=
=
+
+
-
=
=
+
+
-
=
=
+
+
=
+
+
-60,000 Retained Earnings
-
60,000 Rent Expense
-
=
Net Income
-60,000
=
X must equal $58,000 to make the FSET balance. b.
Interest income – Interest receivable increase = Cash received as interest
$ 16,000 (700) $ 15,300
Balance Sheet Transaction
Cash
Begin Balance Record interest income Receive interest payment End Balance
+ +
+
+X
Noncash Assets
3,000 Interest receivable +16,000 Interest receivable
Income Statement
= Liabilities +
Contr. + Capital
=
+
+
=
+
+
Earned Surplus
+16,000 Retained Earnings
Revenue
-
Expenses
=
-
=
+16,000 Interest income
=
+
-X
=
+
+
-
=
+
3,700
=
+
+
-
=
Net Income
+16,000
X must equal $15,300 to make the FSET balance. continued next page
©Cambridge Business Publishers, 2014 Solutions Manual, Chapter 4
4-11
M4-30. concluded c.
Cost of goods sold + Inventory increase + Accounts payable decrease = Cash paid for merchandise purchased
$ 98,000 3,000 4,000 $105,000
Balance Sheet
Income Statement
+
Noncash Assets
= Liabilities
+
Contr. + Capital
Begin Balance
+
19,000 Inventory
=
11,000 Accounts Payable
+
+
-
=
Purchase inventory
+
+X
=
+X
+
+
-
=
=
-Y Accounts Payable
+
+
-
=
Transaction
Pay supplier
Cash
-Y
Recognize Cost of Goods Sold End Balance
+
+
-98,000 Inventory
=
+
22,000
=
7,000
+
+
+
+
Earned Surplus
Revenue
-98,000 Retained Earnings
-
-
-
Expenses
98,000 Cost of Goods Sold
=
=
Net Income
-98,000
=
To make the inventory account work properly, X (purchases) must equal $101,000. If purchases were $101,000, then Y (payments to suppliers) must equal $105,000.
M4-31. (15 minutes—DIRECT METHOD) Operating cash flow + change in operating assets = net income + change in operating liabilities or Net income - change in operating assets + change in operating liabilities = operating cash flow Effect of sales on net income
– Change in accounts receivable = Effect of customers on cash Effect of cost of goods sold on net income - Change in inventory + Change in accounts payable = Effect of merchandise purchases on cash
$825,000 (11,000) $814,000 ($550,000) (13,000) (6,000) ($569,000)
Howell Company received $814,000 in cash from its customers and paid $569,000 in cash to its suppliers. ©Cambridge Business Publishers, 2014 4-12
Financial Accounting, 4th Edition
EXERCISES E4-32. (20 minutes) (All dollar amounts in millions) a. Merck: $12,383/$15,943 = 0.78 Pfizer: $20,240/$28,353 = 0.71 Abbott Labs: $8,970/$16,371 = 0.55 Johnson & Johnson: $14,298/$22,942 = 0.62 b. Merck: $12,383 – ($1,723 – $0) = $10,660 Pfizer: $20,240 – ($1,660 – $0) = $18,580 Abbott Labs: $8,970 – ($1,492 – $0) = $7,478 Johnson & Johnson: $14,298 – ($2,893 – 1,342) = $12,747 c. None of the firms has sufficient cash flow to cover their current liabilities although none of the ratios is of major concern. The industry ratios shown in Chapter 5 on page 233 show that only Abbott Labs is below median. Pfizer is the largest of these three companies and has relatively more cash left over after capital expenditures to consider using on other activities that could strengthen the firm’s operating or financial position. But all four have significant free cash flow that could be invested or returned to shareholders in the form of dividends or stock repurchases. Given that these firms are of different sizes and have different research program success, it is difficult to generalize further.
E4-33. (20 minutes) (All dollar amounts in millions) a. Wal-Mart: $24,255/$60,452 = 0.40 Coca-Cola: $9,474/$21,396 = 0.44 ExxonMobil: $55,345/$70,069 = 0.79 b. Wal-Mart: $24,255 – ($13,510 – $580) = $11,325 Coca-Cola: $9,474 – ($2,920 – $101) = $6,655 ExxonMobil: $55,345 – ($30,975 – $7,533) = $31,903 c. All three companies are producing much more cash than needed for capital expenditures. All of them are returning substantial amounts of cash to shareholders through dividends and share repurchases (more than $11 billion for Wal-Mart, almost $9 billion for Coca-Cola and more than $31 billion for ExxonMobil. ExxonMobil appears to be in the best position with respect to OCFCL, but it is lower than the industry average reported in Chapter 5 on page 233. Wal-Mart and CocaCola have lower ratios, and are also below the average ratio for their industries. ©Cambridge Business Publishers, 2014 Solutions Manual, Chapter 4
4-13
E4-34. (30 minutes—INDIRECT METHOD) MASON CORPORATION Statement of Cash Flows For Year Ended December 31, 2013 Cash flows from operating activities Cash received from customers Cash received as interest Cash paid to employees and suppliers Cash paid as income taxes Net cash provided by operating activities Cash flows from investing activities Sale of land Purchase of equipment Net cash used by investing activities Cash flows from financing activities Issuance of bonds payable Acquisition of treasury stock Payment of dividends Net cash provided by financing activities Net decrease in cash Cash at beginning of year Cash at end of year
$194,000 6,000 (148,000) (11,000) $ 41,000 40,000 (89,000) (49,000) 30,000 (10,000) (16,000) 4,000 (4,000) 16,000 $ 12,000
E4-35. (15 minutes—INDIRECT METHOD) a. Net income Add (deduct) items to convert net income to cash basis Accounts receivable increase Inventory decrease Prepaid insurance increase Accounts payable increase Wages payable decrease Net cash provided by operating activities
$113,000 (5,000) 6,000 (1,000) 4,000 (2,000) $115,000
b. $115,000/[($31,000 + $29,000)/2] =3.83
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Financial Accounting, 4th Edition
E4-36. (15 minutes–INVESTING ACTIVITIES) The basic approach here is to use the beginning and ending balances and the additional information to reconstruct what must have happened during 2013. Begin by setting up the T-accounts for property, plant and equipment with the beginning and ending balances. + Beg. balance
Property, plant and equipment at cost (A) 1000
Ending balance
-
- Accumulated depreciation (XA) 350
Beg. balance
390
Ending balance
1,200
+
At this point in the book, we know four entries that can affect these two accounts – (1) acquisitions using cash, (2) acquisitions without cash (other financing), (3) disposals, and (4) depreciation expense. The journal entries for these entries are given below, with amounts given in the problem filled in. (1)
Property, plant and equipment at cost (+A) Cash (-A)
300 300
To record purchase of property, plant and equipment with cash.
(2)
Property, plant and equipment at cost (+A) Mortgage payable (+L)
100 100
To record purchase of property, plant and equipment with financing.
(3)
Cash (+A) Accumulated depreciation (-XA, +A) Property, plant and equipment at cost (-A) Gain on equipment disposal (+R, +SE)
100 Y X 20
To record sale of used equipment.
(4)
Depreciation expense (+E, -SE) Accumulated depreciation (+XA, -A)
Z Z
To record depreciation expense.
The three unknowns in the journal entries correspond to the three questions in the problem. We begin by putting the journal entry amounts into the T-accounts. continued next page
©Cambridge Business Publishers, 2014 Solutions Manual, Chapter 4
4-15
E4-36. concluded + Beg. balance (1) (2) (3) Ending balance
Property, plant and equipment at cost (A) 1000 300 100 X
-
- Accumulated depreciation (XA) 350
+ Beg. balance
(3) (4)
Y Z 390
1,200
Ending balance
a. The PPE at cost account will only balance if the value X equals 200. So, the original cost of the used equipment that was sold is €200. We can put that amount in the Taccount (so it balances) and also in Journal entry (3). b. Now, looking at journal entry (3), we see that there is only one unknown left – the depreciation that had accumulated on the used equipment. In order for the entry to balance (with debits equal to credits), the accumulated depreciation must have been 120 (= Y). Cost of 200 and accumulated depreciation of 120 would produce a net book value of 80, so when Meubles Fischer sold it for 100, they recorded a gain of 20 on the disposal. c. Back at the Accumulated depreciation T-account, we can fill in the entry for (3), leaving only the depreciation expense to determine for entry (4). Knowing that the disposal reduced the contra-asset by 120, and that the contra-asset increased by 40 over the year, we can infer than the depreciation expense must have been €160 (= Z).
E4-37. (15 minutes—INVESTING ACTIVITIES) The basic approach here is to use the beginning and ending balances and the additional information to reconstruct what must have happened during 2013. Begin by setting up the T-accounts for property, plant and equipment with the beginning and ending balances. + Beg. balance
Ending balance
Property, plant and equipment at cost (A) 175
183
-
- Accumulated depreciation (XA) 78
Beg. balance
83
Ending balance
+
continued next page
©Cambridge Business Publishers, 2014 4-16
Financial Accounting, 4th Edition
E4-37. concluded At this point in the course, we know four entries that can affect these two accounts – (1) acquisitions using cash, (2) acquisitions without cash (other financing), (3) disposals, and (4) depreciation expense. The journal entries for these entries are given below, with amounts given in the problem filled in. (1)
Property, plant and equipment at cost (+A) Cash (-A)
28 28
To record purchase of property, plant and equipment with cash.
(2)
Property, plant and equipment at cost (+A) Mortgage payable (+L)
0 0
To record purchase of property, plant and equipment with financing.
(3)
Cash (+A) Accumulated depreciation (-XA, +A) Loss on equipment disposal (+E, -SE) Property, plant and equipment at cost (-A)
Z Y 5 X
To record sale of used equipment.
(4)
Depreciation expense (+E, -SE) Accumulated depreciation (+XA, -A)
17 17
To record depreciation expense.
The three unknowns in the journal entries correspond to the three questions in the problem. We begin by putting the journal entry amounts into the T-accounts. + Beg. balance (1) (2) (3)
Property, plant and equipment at cost (A) 175 28 0 X
Ending balance
183
-
- Accumulated depreciation (XA) 78
Y 17 83
+ Beg. balance
(3) (4) Ending balance
a. The PPE at cost account will only balance if the value X equals 20. So, the original cost of the used equipment that was sold is £20. We can put that amount in the Taccount (so it balances) and also in Journal entry (3). b. The accumulated depreciation account will only balance if the value Y equals 12. So, the accumulated depreciation on the used equipment sold must be £12, and that amount can be entered into transaction (3) above. c. Now, looking at journal entry (3), we see that there is only one unknown left – the amount of cash received from disposal of the used equipment. In order for the entry to balance (with debits equal to credits), the cash amount must have been £3 million (= Z). Cost of 20 and accumulated depreciation of 12 would produce a net book value of 8, so when Kasznik Ltd. sold it for 3, they recorded a loss of 5 on the disposal. ©Cambridge Business Publishers, 2014 Solutions Manual, Chapter 4
4-17
E4-38. (30 minutes) a. The analysis on page ***160*** on the text shows that Cash flow (payments)
+
Change in inventory
=
Change in accounts payable
+
Net income (COGS expense)
X
+
666 (=8,044-7,378)
=
225 (=4,810-4,585)
+
-51,692
The solution to this is that X = -$51,692 – 666 + 225 = -$52,133. So, the payments to suppliers reduced cash by $52,133 million in fiscal year 2011. b. The net property and equipment account increased by $342 million (=$11,526 – 11,184). Depreciation expense would have decreased this balance by $809 million in fiscal year 2011, so the net investment must have been $1,151 million (=$342 + 809) to result in the ending balance of $11,526 million. c. With the beginning balance of $16,848 million in retained earnings, net earnings of $2,714 would have increased retained earnings to $19,562 million. But the ending balance in retained earnings is $18,877 million, so Walgreens must have paid $685 million in dividends (=$19,562 - $18,877).
E4-39. (15 minutes) a.
b.
Cash flows from investing activities will show: Purchase of stock investments Sale of stock investments
$ (80,000) 59,000
Cash flows from financing activities will show: Issuance of bonds Retirement of bonds
$130,000 (131,000)
©Cambridge Business Publishers, 2014 4-18
Financial Accounting, 4th Edition
E4-40. (20 minutes) a. The net increase in property and equipment was $4,635,377 (= $84,767,771 $80,132,394), and the expenditures should have increased this by $5,559,183. Therefore the original cost of the property and equipment sold must have been 923,806 (= $5,559,183 - $4,635,377). Depreciation expense should have increased the accumulated depreciation account by $3,174,956, but the account increased by only $2,268,583. The accumulated depreciation on the property and equipment sold must account for the difference, making it $906,373 (= $3,174,956 – 2,268,583). b. The book value of the property and equipment sold was $17,433 (=$923,806 – 906,373), and the reported gain on sale of the property and equipment was $79,483. Therefore, the cash proceeds must have been $96,916 (= $17,433 + 79,483), which is the amount reported in Golden Enterprises’ cash flows from investing activities. c. Cash (+A) Accumulated depreciation (-XA, +A) Property and equipment, cost (-A) Gain on sale of property and equipment (+R, +SE)
$ 96,916 906,373 $ 923,806 79,483
d. Retained earnings increased by $1,547,261 (= $18,866,264 – 17,319,003), and net income was $3,014,768. The difference would be accounted for by cash dividends paid to shareholders, and the amount is $1,467,507.
E4-41. (20 minutes—DIRECT METHOD) a.
Advertising expense + Prepaid advertising increase = Cash paid for advertising
$ 62,000 4,000 $ 66,000
b.
Income tax expense + Income tax payable decrease = Cash paid for income taxes
$ 29,000 2,200 $ 31,200
c.
Cost of goods sold – Inventory decrease – Accounts payable increase = Cash paid for merchandise purchased
$180,000 (5,000) (2,000) $173,000
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E4-42. HOSKINS CORPORATION Statement of Cash Flows Year ended December 31, 2013 Cash Flows from Operations: Net income $ 700 Adjustments: Add back Depreciation 350 – Change in Accounts Receivable (900) – Change in Inventory (100) – Change in Prepaid Expenses 250 + Change in Accounts Payable 400 + Change in Income Taxes Payable (100) Cash Flows from Operating Activities Cash Flows from Investing: Purchases of Equipment Proceeds from Disposal of Equipment Cash Flows from Investing Activities
(1,200) 600
Cash Flows from Financing: Dividends Paid Increase in Short-term Debt Decrease in Long-term Debt Cash Flows from Financing Activities
(250) 1,500 (1,000)
Net Change in Cash Beginning Cash Balance Ending Cash Balance
$ 600
(600)
250 250 300 $ 550
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Financial Accounting, 4th Edition
E4-43. (30 minutes—DIRECT METHOD) a. Sales – Accounts Receivable Increase = Cash Received from Customers
$750,000 (5,000) $745,000
Cost of Goods Sold – Inventory Decrease – Accounts Payable Increase = Cash Paid for Merchandise Purchased
$470,000 (6,000) (4,000) $460,000
Wages Expense + Wages Payable Decrease = Cash Paid to Employees
$110,000 2,000 $112,000
Insurance Expense + Prepaid Insurance Increase = Cash Paid for Insurance
$ 15,000 1,000 $ 16,000
Cash Flows from Operating Activities Cash Received from Customers Cash Paid for Merchandise Purchased Cash Paid to Employees Cash Paid for Rent Cash Paid for Insurance Net Cash Provided by Operating Activities b.
$745,000 $460,000 112,000 42,000 16,000
630,000 $115,000
$115,000/[($31,000 + $29,000)/2] =3.83
E4-44. (15 minutes) 1.
True
---
2.
False
$25
3.
False
$10
4.
False
$0
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PROBLEMS P4-45. (20 minutes) Cash flows from operating activities Net income ...........................................................................................
$135,000
Adjustments to reconcile net income to operating cash flows Add back depreciation expense ...................................................... $25,000 Gain on sale of assets
(5,000)
Subtract changes in: Accounts receivable........................................................................ (10,000) Prepaid expenses ...........................................................................
3,000
Add changes in: Accounts payable ...........................................................................
6,000
Wages payable ............................................................................... (4,000)
Net cash provided from operating activities .........................................
15,000
$150,000
P4-46. (45 minutes—INDIRECT METHOD) a. Cash, December 31, 2013........................................................ $11,000 Cash, December 31, 2012........................................................ 5,000 Cash increase during 2013....................................................... $ 6,000 continued next page
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Financial Accounting, 4th Edition
P4-46. concluded b. STATEMENT OF CASH FLOWS (INDIRECT METHOD) WOLFF COMPANY Statement of Cash Flows For Year Ended December 31, 2013 Net Cash Flow from Operating Activities Net Income Add (Deduct) Items to Convert Net Income to Cash Basis Depreciation Accounts Receivable Increase Inventory Increase Prepaid Insurance Decrease Accounts Payable Decrease Wages Payable Increase Income Tax Payable Decrease Net Cash Provided by Operating Activities Cash Flows from Investing Activities Purchase of Plant Assets Cash Flows from Financing Activities Issuance of Bonds Payable Payment of Dividends Net Cash Provided by Financing Activities Net Increase in Cash Cash at Beginning of Year Cash at End of Year
$56,000 17,000 (9,000) (30,000) 2,000 (3,000) 3,000 (1,000) $35,000 (55,000) 55,000 (29,000) 26,000 6,000 5,000 $11,000
c. (1) $35,000/(($23,000 + $24,000)/2) = 1.49 (2) $35,000/$55,000 = 0.64 Wolff’s cash flow ratios indicate that, while the company has sufficient cash flow to cover its current obligations, it must rely on external financing to pay for capital expenditures.
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P4-47. (30 minutes) a. Adjustments to Convert Income Statement Items to Operating Activity Cash Flows Net income $ 56,000
Sales revenue = $635,000
–Cost of goods sold
–Wage expenses
–Insurance expense
–Depreciation expense
–Interest expense
+Gains
–Losses
–Income tax expense
–430,000
–86,000
–8,000
–17,000
–9,000
0
0
–29,000
Adjustments: +Depreciation expense
Add back depreciation expense
+17,000 –Gains 0
Subtract (add) non-operating gains (losses)
+Losses 0
Subtract the change in operating assets (operating investments)
–change in accounts receivable -9,000
Add the change in operating liabilities (operating financing)
–change in inventory
–change in prepaid insurance
-30,000
-(-2,000)
+change in accounts payable
+change in wages payable
+change in income tax payable
+(-3,000)
+3,000
+(-1,000)
Cash from operations
Receipts from = customers
–Payments for merchandise
–Payments for Wages
–Payments for insurance
$ 35,000
$626,000
-463,000
-83,000
-6,000
(zero) 0
–Payments for interest -9,000
(zero) +0
(zero) –0
–Payments for income tax –30,000
b. Computing cash flows from operating activities using the direct method provides additional detail about the specific cash flows that occurred during the period. For example, the indirect method does not reveal that Wolff paid $463,000 for merchandise during 2013, or $83,000 for wages. Because this detail is missing, the FASB requires supplemental disclosure of two specific (and important) cash payments – interest and taxes – if the indirect method is used.
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Financial Accounting, 4th Edition
P4-48. (45 minutes—INDIRECT METHOD) a. Cash, December 31, 2013 Cash, December 31, 2012 Cash increase during 2013
$49,000 28,000 $21,000
b. STATEMENT OF CASH FLOWS (INDIRECT METHOD) ARCTIC COMPANY Statement of Cash Flows For Year Ended December 31, 2013 Net Cash Flow from Operating Activities Net Loss Add (Deduct) Items to Convert Net Loss to Cash Basis Depreciation Gain on Sale of Land Accounts Receivable Decrease Inventory Decrease Prepaid Advertising Decrease Accounts Payable Decrease Interest Payable Increase Net Cash Used by Operating Activities Cash Flows from Investing Activities Sale of Land Purchase of Equipment Net Cash Used by Investing Activities Cash Flows from Financing Activities Issuance of Bonds Payable Purchase of Treasury Stock Net Cash Provided by Financing Activities Net Increase in Cash Cash at Beginning of Year Cash at End of Year
$ (42,000)
22,000 (25,000) 8,000 6,000 3,000 (14,000) 6,000 $ (36,000) 70,000 (183,000)* (113,000) 200,000 (30,000) 170,000 21,000 28,000 $ 49,000
* The sum of the increase in PPE assets account ($138,000) and the book value of the land sold ($45,000).
c. - $36,000/(($23,000 + $31,000)/2) = -1.33 - $36,000/$183,000 = -0.20 Arctic’s operating cash flows are negative, primarily because the firm reported a net loss for the year. As a consequence, its cash flow ratios indicate insufficient cash flows to fund operations and capital expenditures.
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P4-49. (30 minutes) a. Adjustments to Convert Income Statement Items to Operating Activity Cash Flows Net income (loss) –$ 42,000
Sales revenue $728,000
–Cost of goods sold –534,000
–Wage expenses –190,000
–Advertising expense –31,000
–Depreciation expense –22,000
–Interest expense –18,000
+Gains
–Losses
+25,000
0
Income tax expense –0
Adjustments:
Add back depreciation expense
+Depreciation expense +22,000 –Gains –25,000
Subtract (add) non-operating gains (losses)
Subtract the change in operating assets (operating investments)
+Losses 0
–change in accounts receivable -(-8,000)
Add the change in operating liabilities (operating financing) Cash from operations –$ 36,000
Receipts from = customers $736,000
–change in inventory -(-6,000)
–change in prepaid advertising -(-3,000)
+change in accounts payable +(-14,000)
+change in wages payable +0
–Payments for merchandise –542,000
–Payments for Wages –190,000
+change in interest payable +6,000 –Payments for advertising –28,000
(zero) 0
–Payments for interest –12,000
+change in income tax payable +0
(zero) +0
(zero) –0
–Payments for income tax –0
b. Computing cash flows from operating activities using the direct method provides additional detail about the specific cash flows that occurred during the period. For example, the indirect method does not reveal that Arctic paid $542,000 for merchandise during 2013, or $28,000 for advertising. Because this detail is missing, the FASB requires supplemental disclosure of two specific (and important) cash payments – interest and taxes – if the indirect method is used.
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Financial Accounting, 4th Edition
P4-50. (50 minutes—INDIRECT METHOD) a. Cash, December 31, 2013................................................ Cash, December 31, 2012................................................ Cash increase during 2013...............................................
$27,000 18,000 $ 9,000
b. STATEMENT OF CASH FLOWS (INDIRECT METHOD) DAIR COMPANY Statement of Cash Flows For Year Ended December 31, 2013 Net Cash Flow from Operating Activities Net Income Add (deduct) items to convert net income to cash basis Depreciation Amortization of intangible assets Loss on bond retirement Accounts receivable increase Inventory decrease Prepaid expenses increase Accounts payable increase Interest payable decrease Income tax payable decrease Net cash provided by operating activities Cash flows from investing activities Sale of equipment Cash flows from financing activities Retirement of bonds payable Issuance of common stock Payment of dividends Net cash used by financing activities Net increase in cash Cash at beginning of year Cash at end of year
$ 85,000
22,000 7,000 5,000 (5,000) 6,000 (2,000) 6,000 (3,000) (2,000) $119,000 17,000 (125,000) 24,000 (26,000) (127,000) 9,000 18,000 $ 27,000
continued next page
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P4-50. concluded c. (1) Supplemental cash flow disclosures Cash paid for interest ............................................................................ Cash paid for income taxes................................................................... *
Interest expense + Interest payable decrease Cash paid for interest † Income tax expense + Income tax payable decrease Cash paid for income taxes
$10,000 3,000 $13,000 $36,000 2,000 $38,000
(2) Schedule of noncash investing and financing activities Issuance of bonds payable to acquire equipment................................. d. (1) (2) (3)
$ 13,000* $ 38,000†
$ 60,000
$119,000/[($42,000 + $41,000)/2] = 2.87. The firm did not spend any cash on capital investments. The firm did issue debt for equipment, but this is not a capital expenditure. $119,000 + $17,000 = $136,000
P4-51. (45 minutes) a. Depreciation and amortization are a noncash expenses that are deducted in the computation of net income. The depreciation and amortization add-back zeros these expenses out of the income statement to focus on cash profitability. The positive amount for depreciation and amortization does not mean that the company is generating cash from depreciation and amortization, a common misconception. It is merely an adjustment to remove these expenses from the computation of profit. b. The adjustments must be interpreted relative to the amounts included in net income. The $(73,670,000) adjustment for receivables means that Staples collected this much less than it recognized as revenue. The adjustment for accrued expenses implies that Staples paid $117,389,000 more than the expenses already recognized in net income. c. Acquisition of property and equipment are less than the depreciation and amortization recognized for the year. Unless the prices for property and equipment are falling, that relationship implies that Staples may not be replacing its capacity. A growing company will have capital expenditures that exceed the depreciation on its existing property and equipment. continued next page
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Financial Accounting, 4th Edition
P4-51. concluded d. Staples operates businesses in 26 countries outside of the U.S. including businesses in Europe, Asia, South America, Australia, and Canada. This means that some of its cash transactions occur in currencies other than the U.S. dollar. This fact requires the company to hold cash in other currencies that may be revalued relative to the dollar from one period to the next. When foreign cash balances are revalued in foreign exchange markets relative to the U.S. dollar, the dollar value of the company’s cash balance changes even though there was no actual cash flow. Hence, this exchange rate effect is listed in the cash flow statement to explain the change in the cash balance. e. Although net cash decreased during the period, Staples presents a “healthy” cash flow picture for the year. It generated almost $1.6 billion of operating cash flow. Most of this amount was returned to lenders and shareholders, rather than being used to grow the business. Staples returned over $900 million to shareholders in the form of dividends and share repurchases, plus it reduced its net borrowings by about $500,000.
P4-52. (50 minutes—INDIRECT METHOD) a. Cash and cash equivalents, December 31, 2013............................ $19,000 Cash and cash equivalents, December 31, 2012............................ 25,000 Cash and cash equivalents decrease during 2013.......................... $ 6,000 b.
See the cash flow statement provided on the following page.
c. (1)
(2)
Supplemental Cash Flow Disclosures Cash paid for interest Cash paid for income taxes
$ 12,000* $ 46,000†
* Interest expense - Interest payable increase Cash paid for interest
$13,000 (1,000) $12,000
† Income tax expense + Income tax payable decrease Cash paid for income taxes
$44,000 2,000 $46,000
Schedule of noncash investing and financing activities Issuance of preferred stock to acquire patent
$ 25,000
d. (1) $101,000/[($34,000 + $31,000)/2] = 3.11. (2) $101,000/($185,000) = 0.55. (3): $101,000 – ($90,000 + $95,000 - $14,000) = -$70,000
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P4-52. concluded b. RAINBOW COMPANY Statement of Cash Flows For Year Ended December 31, 2013 Net cash flow from operating activities Net income Add (deduct) items to convert net income to cash basis Depreciation Patent amortization Loss on sale of equipment Gain on sale of investments Accounts receivable increase Inventory increase Prepaid expenses increase Accounts payable increase Interest payable increase Income tax payable decrease Net cash provided by operating activities ……… Cash flows from investing activities Sale of investments Purchase of land Improvements to building Sale of equipment Net cash used by investing activities Cash flows from financing activities Issuance of bonds payable Issuance of common stock Payment of dividends Net cash provided by financing activities ……… Net decrease in cash and cash equivalents Cash and cash equivalents at beginning of year …. Cash and cash equivalents at end of year
$ 90,000
39,000 7,000 5,000 (3,000) (10,000) (26,000) (4,000) 4,000 1,000 (2,000) $101,000 60,000 (90,000) (95,000) 14,000 (111,000) 30,000 24,000 (50,000) 4,000 (6,000) 25,000 $ 19,000
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Financial Accounting, 4th Edition
P4-53. (35 minutes) a. Cash and cash equivalents, December 31, 2013 ……….. Cash and cash equivalents, December 31, 2012 ……….. Cash and cash equivalents decrease during 2013 ……..
$19,000 25,000 $ 6,000
b. RAINBOW COMPANY Statement of Cash Flows (Direct Method) For Year Ended December 31, 2013 Cash flows from operating activities Cash received from customers ………………………… $740,000 Cash received as dividends …………………………….. 15,000 Cash paid for merchandise purchased ……………….. 462,000 Cash paid for wages and other operating expenses … 134,000 Cash paid for interest …………………………………….. 12,000 Cash paid for income taxes ……………………………… 46,000 Net cash provided by operating activities …………….. Cash flows from investing activities Sale of investments ……………………………………….. Purchase of land …………………………………………… Improvements to building ………………………………… Sale of equipment ………………………………………….. Net cash used by investing activities …………………...
60,000 (90,000) (95,000) 14,000
Cash flows from financing activities Issuance of bonds payable ………………………………. Issuance of common stock ………………………………. Payment of dividends ……………………………………… Net cash provided by financing activities ………………
30,000 24,000 (50,000)
Net decrease in cash and cash equivalents ……………….. Cash and cash equivalents at beginning of year …………. Cash and cash equivalents at end of year ………………….
$755,000
(654,000) 101,000
(111,000)
4,000 (6,000) 25,000 $ 19,000
continued next page
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P4-53. concluded c. (1) Reconciliation of net income to net cash flow from operating activities Net income Add (deduct) items to convert net income to cash basis Depreciation Patent amortization Loss on sale of equipment Gain on sale of investments Accounts receivable increase Inventory increase Prepaid expenses increase Accounts payable increase Interest payable increase Income tax payable decrease Net cash provided by operating activities
$ 90,000 39,000 7,000 5,000 (3,000) (10,000) (26,000) (4,000) 4,000 1,000 (2,000) $101,000
(2) Schedule of noncash investing and financing activities Issuance of preferred stock to acquire patent
$ 25,000
P4-54. (30 minutes) Operating cash flow + change in operating assets = net income + change in operating liabilities or Net income - change in operating assets + change in operating liabilities = operating cash flow a. Apple’s adjustment for accounts receivable is (plus) $143 million. This adjustment represents minus the change in receivables, so Apple’s accounts receivable must have gone down by $143 million. ($ millions) Net sales ………………………………………………………………… - Change in accounts receivable …………………………………… + Change in deferred revenue Cash collected from customers …………………………………….. b. ($ millions) - Cost of goods sold ……………………………………………………. - Change in inventories …………………………………………….. + Change in accounts payable ……………………………………… - Cash paid for purchases of inventories ……………………………
$108,249 +143 +1,654 $110,046
($64,431) +275 2,515 ($61,641) continued next page
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Financial Accounting, 4th Edition
P4-54. concluded c. ($ billions) Property, plant and equipment, ending balance ………………… - Purchases of property, plant and equipment ………………… + Book value of PPE assets sold …………………………………... + Depreciation of property, plant and equipment ……………… Property, plant and equipment, beginning balance ……………
$7.8 (4.3) none 1.6 $5.1
d. Stock-based compensation expense is deducted when calculating net income similar to cash compensation. The only difference is that the compensation is paid in shares of stock (or stock options) instead of cash. Because stock-based compensation does not require the payment of cash, it is treated as a noncash expense, much like depreciation, and added back to net income when the indirect method is used in the cash flow statement. Generally speaking, compensation cost is classified as part of operating activities whether or not the compensation is paid in cash.
P4-55. (75 minutes) a.
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P4-55. concluded b. The following statement of cash flows from operations combines the effects of the income tax asset and liability and combines the effects of the deferred tax asset and liability. In addition, the effects of changes in current and noncurrent salary continuation plan liabilities have been combined in the operating cash flow. GOLDEN ENTERPRISES, INC. Consolidated Statement of Cash Flows Year ended June 3, 2011 CASH FLOWS FROM OPERATING ACTIVITIES: Net income Adjustments to reconcile net income to net cash provided by operating activities: Depreciation Deferred income taxes Gain on sale of property and equipment - Change in receivables, net - Change in inventories - Change in prepaid expenses - Change in cash surrender value of insurance - Change in other assets + Change in accounts payable + Change in accrued expenses + Change in salary continuation plan + Change in accrued income taxes Net cash provided by operating activities CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of property, plant and equipment Proceeds from sale of property, plant and equipment Net cash used in investing activities
$ 3,014,768 3,174,956 1,329,868 (79,483) (685,678) (94,964) (230,574) 364,240 (167,256) 186,036 138,626 (92,506) (1,103,498) 5,754,535
(5,559,183) 96,916 (5,462,267)
CASH FLOWS FROM FINANCING ACTIVITIES: Debt proceeds Debt repayments Change in checks outstanding in excess of bank balances Purchase of treasure shares Cash dividends paid Net cash provided by financing activities NET INCREASE IN CASH AND CASH EQUIVALENTS CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR CASH AND CASH EQUIVALENTS AT END OF YEAR
38,903,745 (36,328,583) (85,126) (36,960) (1,467,507) 985,569 1,277,837 1,443,801 $ 2,721,638
c. OCFCL = $5,754,535 ÷ [(14,216,457 + 14,212,044) ÷ 2] = 0.40 OCFCX = $5,754,535 ÷ 5,559,183 = 1.04
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Financial Accounting, 4th Edition
P4-56. (20 minutes) a. The positive adjustment of $314,872 thousand (say, $315 million) is caused by the change in the amount that Groupon owes its merchants. When a customer purchases, Groupon gets the cash quickly and then waits to pay the merchants (recognizing the accrued merchant payable liability). If we add the fact that Groupon is growing very quickly, it means that the accrued merchant payable grows over the period. The adjustment reflects the fact that the merchant share of the amount collected from customers is $315 million more than the amount that Groupon paid to the merchants. Will this continue into the future? Only if Groupon continues to grow and if its payment terms to merchants remain unchanged. If Groupon’s growth went to zero, then the accrued merchant payable would level out and the change would go to zero. Likewise, if competitors forced Groupon to speed up its payments to merchants, the accrued merchant payable liability would decrease, and the company’s ability to generate a positive cash flow from operations would be impaired. In the risk factors section of the SEC document, Groupon states “Our operating cash flow and results of operations could be adversely impacted if we change our merchant payment terms or our revenue does not continue to grow.” b. While Groupon used $121 million in cash for investing activities, most of this was for acquisitions of businesses and investments, rather than for capital expenditures (only about $30 million). The OCFCX ratio was $129,511 ÷ $29,825 = 4.34. Groupon appears to be growing more by acquisition than by “organic” growth. c. Groupon used $353,550 thousand to repurchase its own common stock and another $35,221 to redeem its own preferred stock, a total of about $389 million. This might prompt a financial statement reader to look at the related party transactions section of the company’s filing with the SEC prior to its initial public offering. For example, in December 2010 and January 2011, Groupon issued new preferred stock in exchange for $942.2 million in cash. Of this amount, $132.4 million was retained in the company. The remaining $809.8 million was used to redeem shares of common and preferred stock, mostly from current and former board members and from entities that they control. In the use of proceeds section of the SEC document, Groupon states “Based on our current cash and cash equivalents, together with cash generated from operations, we do not expect that we will utilize any of the net proceeds of this offering to fund operations…during the next twelve months.”
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CASES AND PROJECTS C4-57. (30 minutes) The required debt to equity ratio allows for total liabilities to be up to $477 million. That is $477 / ($125+$148) =1.747 < 1.75. This implies total short-term borrowing of $107 million and an ending cash balance of $70 million. LAMBERT CO. Statement of Cash Flows (projected) Cash from operations Net income …………………………………………………… Depreciation expense ……………………………………… Increase in accounts receivable …………………………. Decrease in inventory ……………………………………… Increase accounts payable ……………………………….. Decrease in income taxes payable ………………………. Cash provided by (used in) operations ……………….. Cash from investing Acquisitions of property, plant and equipment ………… Disposal proceeds ………………………………………….. Cash provided by (used in) investing …………………. Cash from financing Issue long-term debt ……………………………………….. Repay long-term debt ……………………………………….. Common stock issue ……………………………………….. Shareholder dividends ……………………………………… Increase (decrease) in short-term borrowing …………… Cash provided by (used in) financing ………………….. Net change in cash …………………………………………….. Beginning cash balance ………………………………………. Ending cash balance …………………………………………..
$
18 120 (40) 20 30 (10) $ 138 (225) 75 (150) 80 (100) 25 (30) 57
$
32 20 50 70
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Financial Accounting, 4th Edition
C4-58. (45 minutes) a. 1 2 3 4 5 6 7 8 9 10 11
12 13 14 15
Accounts receivable (+A) …………………………… Sales revenue (+R,+SE)…………………………
3,800
Cash (+A) ……………………………………………… Accounts receivable (-A) ………………………
3,500
Cost of goods sold (+E,-SE) ………………………… Inventory (-A) …………………………………….
1,800
Inventory (+A) ………………………………………… Accounts payable (+L) …………..……………..
1,200
Accounts payable (-L) …..…………………………… Cash (-A) …….…………………………………..
1,100
3,800 3,500 1,800 1,200 1,100
Salaries and wages expense (+E,-SE) ……………. Salaries and wages payable (+L) …………….
700
Salaries and wages payable (-L) …………………… Cash (-A) ……..…………………………………..
730
Rent expense (+E,-SE)……………………….……… Prepaid rent (-A) ………………………………..
200
Prepaid rent (+A) ……………………..……………… Cash (-A) …….…………………………………..
600
Depreciation expense (+E,-SE) ……………………. Accumulated depreciation (+XA,-A) ………….
150
700 730 200 600 150
Cash (+A) ………………………………………………. Accumulated depreciation (-XA,+A) ………………… Fixtures and equipment (-A) ……………………
10 70
Fixtures and equipment (+A) ……………………….. Cash (-A) …………………………………………..
800
Interest expense (+E,-SE) …..……………………….. Cash (-A) …………………………………………..
16
Bank loan payable (-L) ……….……………………….. Cash (-A) …………………………………………..
1,600
Cash (+A) ……………………………………………….. Long-term loan payable (+L) ……………………
2,000
80 800 16 1,600 2,000 continued next page
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C4-58. continued 16 17 18
Income tax expense (+E,-SE) …………………………. Taxes payable (+L) ………………………………..
374
Retained earnings (-SE) ………………………………. Cash (-A) ……………………………………………
80
Revenue (-R) ……………………………………………. Cost of goods sold (-E) …………………………. Salaries and wages expense (-E) ……………… Rent expense (-E) ………………………………… Depreciation expense (-E) ……………………… Interest expense (-E) …………………………….. Income tax expense (-E) ………………………… Retained earnings (+SE) …………………………
3,800
374 80 1,800 700 200 150 16 374 560
Entry 18 closes revenue and expense accounts to retained earnings. b. + 2
11
15 Bal
Cash (A) 600 3,500 1,100 5 730 7 600 9 10 800 12 16 13 1,600 14 2,000 80 17 1,184
- Accounts Payable (L) + 3,000 5 1,100 1,200 4 3,100 Bal
- Salaries and Wages + Payable (L) 100 7 730 700 6 70 Bal
+ 4 Bal
Inventory (A) 2,400 1,200 1,800 1,800
3
- Retained Earnings (SE)+ 1,300 17 80 560 18 1,780 Bal
-
+ Accounts Rec. (A) 6,500 1 3,800 3,500 2 Bal 6,800
- Common Stock (SE) + 4,600 4,600 Bal
Taxes Payable (L) 0 374 374
+ 16 Bal
- Bank Loan Payable (L) + 1,600 14 1,600 0 Bal - Long-term Loan (L) + 0 2,000 15 2,000 Bal
18
Revenue (R) + 3,800 1 3,800 0 Bal
+ Cost of Goods Sold (E) 3 1,800 1,800 18 Bal 0 + Salaries & Wages (E) 6 700 700 18 Bal 0
continued next page
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C4-58. concluded + Prepaid Rent (A) 0 9 600 200 Bal 400
+
12 Bal
+ 8 8
Fixtures and Equipment (A) 1,900 800 80 11 2,620
- Accum. Deprec. (XA) + 800 11 70 150 10 880 Bal
Bal
Rent Expense (E) 200 200 0
18
+ Depreciation Exp. (E) 10 150 150 18 Bal 0 + Interest Expense (E) 13 16 16 18 Bal 0 + Income Tax Exp (E) 16 374 374 18 Bal 0
C4-59. (30 minutes) a. Depreciation and amortization are noncash expenses that are deducted in the computation of net income. The depreciation and amortization add-back zeros these expenses out of the income statement to focus on operating cash flow. The positive amount for depreciation and amortization does not mean that the company is generating cash from depreciation and amortization, a common misconception. It is merely an adjustment to remove these expenses from net income to convert profit to cash flow. b. Gains on disposals of asset are the result of investing activity, not operating activity, but these gains are recognized in net income. When we start with net income in an indirect method cash from operations, subtracting the gain removes this investing item from the determination of cash from operations. Daimler reports cash proceeds from disposals of PPE and intangible assets of €252 million. If the recognized gain is €102 million, then the book value of the assets disposed would be €150 million (= €252 million – 102 million). c. It does not. The adjustments can only be interpreted relative to the amounts that are included in net income. The negative €2,328 million inventory adjustment means that Daimler’s cost to acquire inventory for the year exceeded its cost of goods sold for the year by €2,328 million. continued next page
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C4-59. concluded d. Free cash flow (€ millions): –€696 – $(4,158 – 252) = -€4,602. Daimler’s operating cash flow is negative, as is its free cash flow. We did not include acquisition of intangible assets in the calculation. Doing so would have reduced free cash flow by another €1.7 billion. Daimler financed its investing activities by additions to long-term financing. e. Daimler’s cash flow from operating activities is negative, as is its cash flow from investing activities. It generated a positive cash flow of €5,842 million from financing activities. As a result, the net decrease in cash was €1,327million. Daimler appears to be strong enough to withstand a reduction in cash of this magnitude, especially given that it has a record (in 2010 and 2009) of reporting very positive cash flows from operations. To be thorough in analyzing Daimler’s liquidity and solvency, one would want to ask why operating cash flows were negative. A closer look at the company’s business segments reveals that the Industrial Business had cash from operations of €7.3 billion and free cash flow of about €3.4 billion. Daimler Financial Services had cash from operations of (€8.0) billion, resulting from large increases in financial services receivables and vehicles on operating leases. In its analysis of cash flows, Daimler reports that “The positive effect from the improvement in net profit before income taxes was reduced in particular by increased new business in leasing and sales financing as well as by significantly higher allocations to the pension funds.”
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Financial Accounting, 4th Edition
